UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
 
Form 10-Q
 
☒QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period endedJune 30, 2019March 31, 2020
 
OR
☐TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from_____________to_____________
Commissionfile number 001-36583
 
ENERGY FOCUS, INC.
(Exact name of registrant as specified in its charter)  
Delaware94-3021850
(State or other jurisdiction of incorporation or organization)(I.R.S. Employer Identification No.)
32000 Aurora Road, Suite B Solon, OH
(Address of principal executive offices)
44139
(Zip Code)
(Registrant’s telephone number, including area code): (440)715-1300
None
(Former Name, Former Addressname, former address and Former Fiscal Year, If Changed Since Last Report)former fiscal year, if changed since last report)


Securities registered pursuant to Section 12(b) of the Act:
 
Title of each class
Trading

Symbol(s)
Name of each exchange

on which registered
Common Stock, par value $0.0001 per shareEFOINASDAQ
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes ☑    No ☐
 
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (Section 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).  Yes ☑    No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer ☐
☐Accelerated filer☐
Non-accelerated filer ☐☑Smaller reporting company☑
Emerging growth company☐
 
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐


Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes ☐    No ☑
 
The number of outstanding shares of the registrant’s Common Stock,common stock, $0.0001 par value, as of September 10, 2019May 5, 2020 was 12,370,030.15,896,956.



TABLE OF CONTENTS
PART I - FINANCIAL INFORMATION
Page
PART I - ITEM 1. FINANCIAL INFORMATIONSTATEMENTS
Page
ITEM 1.FINANCIAL STATEMENTS
a.Condensed Consolidated Balance Sheets as of June 30, 2019March 31, 2020 (Unaudited) and December 31, 20182019
4
b.Condensed Consolidated Statements of Operations for the three and six months ended June 30,March 31, 2020 and 2019 and 2018 (Unaudited)
5
c.Condensed Consolidated Statements of Comprehensive Loss for the three and six months ended June 30,March 31, 2020 and 2019 and 2018 (Unaudited)
6
d.Condensed Consolidated Statements of Changes in Stockholders' Equity for the three and six months ended June 30,March 31, 2020 and 2019 and 2018 (Unaudited)
7
e.Condensed Consolidated Statements of Cash Flows for the sixthree months ended June 30,March 31, 2020 and 2019 and 2018 (Unaudited)
8
f.Notes to the Condensed Consolidated Financial Statements (Unaudited)
9
ITEM 2.MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
2224
ITEM 3.QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
31
ITEM 4.CONTROLS AND PROCEDURES
31
PART II - OTHER INFORMATION
ITEM 1.LEGAL PROCEEDINGS
3332
ITEM 1A.RISK FACTORS
3332
ITEM 2.UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
3332
ITEM 3.DEFAULTS UPON SENIOR SECURITIES
3332
ITEM 4.MINE SAFETY DISCLOSURES
3332
ITEM 5.OTHER INFORMATION
3332
ITEM 6.EXHIBITS
3433
SIGNATURES
35


1

PART I - FINANCIAL INFORMATION


Forward-looking statements


Unless the context otherwise requires, all references to “Energy Focus,” “we,” “us,” “our,” “our company” or “the Company” refer to Energy Focus, Inc., a Delaware corporation and its subsidiary, and their respective predecessor entitiesentity for the applicable periods, considered as a single enterprise.
This Quarterly Report on Form 10-Q (this “Quarterly Report”) includes statements that express our opinions, expectations, beliefs, plans, objectives, assumptions or projections regarding future events or future results and therefore are, or may be deemed to be, “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. These forward-looking statements can generally be identified by the use of forward-looking terminology, including the terms “believes,” “estimates,” “anticipates,” “expects,” “feels,” “seeks,” “forecasts,” “projects,” “intends,” “plans,” “may,” “will,” “should,” “could” or “would” or, in each case, their negative or other variations or comparable terminology. These forward-looking statements include all matters that are not historical facts. They appear in a number of places throughout this Quarterly Report and include statements regarding our intentions, beliefs or current expectations concerning, among other things, our results of operations, financial condition, liquidity, prospects, growth, strategies, capital expenditures and the industry in which we operate.


By their nature, forward-looking statements involve risks and uncertainties because they relate to events and depend on circumstances that may or may not occur in the future. Although we base these forward-looking statements on assumptions that we believe are reasonable when made, we caution you that forward-looking statements are not guarantees of future performance and that our actual results of operations, financial condition and liquidity, and industry developments may differ materially from statements made in or suggested by the forward-looking statements contained in this Quarterly Report. In addition, even if our results of operations, financial condition and liquidity, and industry developments are consistent with the forward-looking statements contained in this Quarterly Report, those results or developments may not be indicative of results or developments in subsequent periods.


We believe that important factors that could cause our actual results to differ materially from forward-looking statements include, but are not limited to, the risks and uncertainties outlined under “Risk Factors” under Part I, Item 1A of our Annual Report on Form 10-K for the year ended December 31, 20182019 and other matters described in this Quarterly Report generally. Some of these factors include:


•disruptions in the U.S. and global economy and business interruptions resulting from the recent coronavirus (“COVID-19”) health pandemic outbreak and related stay-at-home orders, quarantine policies and restrictions on travel, trade and business operations;
•our need for additional financing in the near term to continue our operations;
•our liquidity and refinancing demands;
•our ability to obtain refinancing or extend maturing debt;
•our ability to continue as a going concern for a reasonable period of time;
•our ability to implement plans to increase sales and control expenses;
•our reliance on a limited number of customers for a significant portion of our revenue, and our ability to maintain or grow such sales levels;
•our ability to increase sales by adding new customers to reduce the reliance of our sales on a smaller group of customers, and the long sales-cycle that our product requires;
•our ability to increase demand in our targeted markets and to manage sales cycles that are difficult to predict and may span several quarters;
•the timing of large customer orders, significant expenses and fluctuations between demand and capacity as we invest in growth opportunities;
•our ability to compete effectively against companies with lower cost structures or greater resources, or more rapid development efforts, and new competitors in our target markets;
•our ability to successfully scale our network of sales representatives, agents, and distributors to match the sales reach of larger, established competitors;
•market acceptance of our high-quality LED lighting technologies and products;
our ability to remediate our material weakness, maintain effective internal controls and otherwise comply with our obligations as a public company and under Nasdaq listing standards;
•our ability to attract and retain qualified personnel, and to do so in a timely manner;
•the impact of any type of legal inquiry, claim or dispute;
•general economic conditions in the United States and in other markets in which we operate or secure products;
2

•our dependence on military maritime customers and on the levels and timing of government funding available to such customers, as well as the funding resources of our other customers in the public sector and commercial markets;

•the possible impact on our military maritime customers and their ability to honor the timing for existing orders or place future orders due to COVID-19 breakouts amongst personnel that might impact the use of ships in service;
•business interruptions resulting from geopolitical actions, including war and terrorism, natural disasters, including earthquakes, typhoons, floods and fires or from health epidemics or pandemics or other contagious outbreaks;
•our reliance on a limited number of third-party suppliers, our ability to obtain critical components and finished products from such suppliers on acceptable terms and of acceptable quality, and the impact of our fluctuating demand on the stability of such suppliers;
•our ability to timely and efficiently transport products from our third-party suppliers to our facility by ocean marine channels;
•our ability to respond to new lighting technologies and market trends, and fulfill our warranty obligations with safe and reliable products;
•any delays we may encounter in making new products available or fulfilling customer specifications;
•any flaws or defects in our products or in the manner in which they are used or installed;
•our ability to protect our intellectual property rights and other confidential information, and manage infringement claims by others;
•our compliance with government contracting laws and regulations, through both direct and indirect sale channels, as well as other laws, such as those relating to the environment and health and safety; and
•risks inherent in international markets, such as economic and political uncertainty, changing regulatory and tax requirements and currency fluctuations, including tariffs and other potential barriers to international trade.trade; and

•our ability to remediate a significant deficiency, maintain effective internal controls and otherwise comply with our obligations as a public company and under NASDAQ listing standards.

In light of the foregoing, we caution you not to place undue reliance on our forward-looking statements. Any forward-looking statement that we make in this Quarterly Report speaks only as of the date of such statement, and we undertake no obligation to update any forward-looking statement or to publicly announce the results of any revision to any of those statements to reflect future events or developments, except as required by law. Comparisons of results for current and any prior periods are not intended to express any future trends or indications of future performance, unless specifically expressed as such, and should only be viewed as historical data.


Energy Focus® is, Intellitube®, RedCap® and EnFocus™ are our registered trademark.trademarks. We may also refer to trademarks of other corporations and organizations in this document.

3

ITEM 1. FINANCIAL STATEMENTS
ENERGY FOCUS, INC.
CONDENSEDCONSOLIDATED BALANCE SHEETS
(in thousands,except share and per share amounts)
(Unaudited)  March 31,
2020		December 31,
2019
June 30,
2019		 December 31,
2018		(Unaudited)
ASSETS   ASSETS
Current assets:   Current assets:
Cash and cash equivalents$2,207
 $6,335
Trade accounts receivable, less allowances of $71 and $33, respectively1,805
 2,201
CashCash$2,911  $350  
Trade accounts receivable, less allowances of $16 and $28, respectivelyTrade accounts receivable, less allowances of $16 and $28, respectively1,904  2,337  
Inventories, net7,667
 8,058
Inventories, net4,700  6,168  
Prepaid and other current assets533
 1,094
Prepaid and other current assets666  479  
Total current assets12,212
 17,688
Total current assets10,181  9,334  
   
Property and equipment, net422
 610
Property and equipment, net390  389  
Operating lease, right-of-use asset1,541
 —
Operating lease, right-of-use asset1,179  1,289  
Restructured lease, right-of-use asset469
 —
Restructured lease, right-of-use asset268  322  
Other assets225
 194
Other assets405  405  
Total assets$14,869
 $18,492
Total assets12,423  11,739  
   
LIABILITIES   LIABILITIES  
Current liabilities:   Current liabilities:  
Accounts payable$2,000
 $3,606
Accounts payable$1,188  $1,340  
Accrued liabilities40
 73
Accrued liabilities104  179  
Accrued legal and professional fees74
 160
Accrued legal and professional fees322  215  
Accrued payroll and related benefits214
 435
Accrued payroll and related benefits448  360  
Accrued sales commissions115
 115
Accrued sales commissions39  32  
Accrued severance73
 188
Accrued severance3  7  
Accrued restructuring28
 156
Accrued restructuring24  24  
Accrued warranty reserve342
 258
Accrued warranty reserve240  195  
Deferred revenue13
 30
Deferred revenue4  18  
Operating lease liabilities531
 —
Operating lease liabilities567  550  
Restructured lease liabilities357
 —
Restructured lease liabilities325  319  
Finance lease liabilities3
 —
Finance lease liabilities3  3  
Credit line borrowings1,652
 2,219
Warrant liabilitiesWarrant liabilities763  —  
Convertible notes1,700
 —
Convertible notes—  1,700  
Iliad note, net of discount and loan origination feesIliad note, net of discount and loan origination fees854  885  
Credit line borrowings, net of loan origination feesCredit line borrowings, net of loan origination fees790  715  
Total current liabilities7,142
 7,240
Total current liabilities5,674  6,542  
   
Other liabilities29
 200
Other liabilities7  14  
Operating lease liabilities1,210
 —
Restructured lease liabilities331
 —
Finance lease liabilities5
 —
Operating lease liabilities, net of current portionOperating lease liabilities, net of current portion770  906  
Restructured lease liabilities, net of current portionRestructured lease liabilities, net of current portion85  168  
Finance lease liabilities, net of current portionFinance lease liabilities, net of current portion3  4  
Iliad note, net of current maturitiesIliad note, net of current maturities—  109  
Total liabilities8,717
 7,440
Total liabilities6,539  7,743  
   
STOCKHOLDERS' EQUITY   STOCKHOLDERS' EQUITY
Preferred stock, par value $0.0001 per share:   Preferred stock, par value $0.0001 per share:  
Authorized: 2,000,000 shares in 2019 and 2018   
Issued and outstanding: no shares in 2019 and 2018—
 —
Authorized: 5,000,000 shares (3,300,000 shares designated as Series A Convertible Preferred Stock) in 2020 and 2,000,000 shares (0 shares designated as Series A Convertible Preferred Stock) in 2019Authorized: 5,000,000 shares (3,300,000 shares designated as Series A Convertible Preferred Stock) in 2020 and 2,000,000 shares (0 shares designated as Series A Convertible Preferred Stock) in 2019  
Issued and outstanding: 2,709,018 at March 31, 2020 and 0 shares outstanding at December 31, 2019Issued and outstanding: 2,709,018 at March 31, 2020 and 0 shares outstanding at December 31, 2019—  —  
Common stock, par value $0.0001 per share:   Common stock, par value $0.0001 per share:
Authorized: 30,000,000 shares in 2019 and 2018   
Issued and outstanding: 12,370,030 at June 30, 2019 and 12,090,695 at December 31, 20181
 1
Authorized: 50,000,000 shares in 2020 and 30,000,000 shares in 2019Authorized: 50,000,000 shares in 2020 and 30,000,000 shares in 2019
Issued and outstanding: 15,896,632 at March 31, 2020 and 12,428,418 at December 31, 2019Issued and outstanding: 15,896,632 at March 31, 2020 and 12,428,418 at December 31, 20192  1  
Additional paid-in capital128,774
 128,367
Additional paid-in capital131,300  128,872  
Accumulated other comprehensive loss(3) (1)Accumulated other comprehensive loss(3) (3) 
Accumulated deficit(122,620) (117,315)Accumulated deficit(125,415) (124,874) 
Total stockholders' equity6,152
 11,052
Total stockholders' equity5,884  3,996  
Total liabilities and stockholders' equity$14,869
 $18,492
Total liabilities and stockholders' equity$12,423  $11,739  
The accompanying notes are an integral part of these condensed consolidated financial statements.

4

ENERGY FOCUS, INC.
CONDENSEDCONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share amounts)
(Unaudited)
Three months ended
March 31,
20202019
Net sales$3,783  $3,177  
Cost of sales2,751  3,079  
Gross profit1,032  98  
Operating expenses:
Product development282  526  
Selling, general, and administrative2,027  2,241  
Restructuring(14) 134  
Total operating expenses2,295  2,901  
Loss from operations(1,263) (2,803) 
Other expenses (income):
Interest expense133  43  
Income from change in fair value of warrants(873) —  
Other expenses18  19  
Net loss(541) (2,865) 
Net loss per share - basic and diluted  
Net loss$(0.04) $(0.24) 
Weighted average common shares outstanding:  
Basic and diluted15,430  12,126  
 Three months ended
June 30,		 Six months ended
June 30,
 2019 2018 2019 2018
Net sales$3,082
 $5,172
 $6,259
 $9,831
Cost of sales3,191
 3,876
 6,270
 7,719
Gross profit (loss)(109) 1,296
 (11) 2,112
        
Operating expenses:       
Product development318
 673
 844
 1,302
Selling, general, and administrative1,594
 2,421
 3,835
 5,068
Restructuring128
 3
 262
 (47)
Total operating expenses2,040
 3,097
 4,941
 6,323
Loss from operations(2,149) (1,801) (4,952) (4,211)
        
Other expenses (income):       
Interest expense26
 1
 69
 2
Other expenses (income)79
 2
 98
 (19)
Net loss$(2,254) $(1,804) $(5,119) $(4,194)
        
Net loss per share - basic and diluted$(0.18) $(0.15) $(0.42) $(0.35)
        
Weighted average shares used in computing net loss per share:       
Basic and diluted12,336
 11,949
 12,231
 11,925


The accompanying notes are an integral part of these condensed consolidated financial statements.

5

ENERGY FOCUS, INC.
CONDENSEDCONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
(in thousands)
(Unaudited)


Three months ended
March 31,
 20202019
Net loss$(541) $(2,865) 
Other comprehensive loss:
Foreign currency translation adjustments—  —  
Comprehensive loss$(541) $(2,865) 
 Three months ended
June 30,		 Six months ended
June 30,
 2019 2018 2019 2018
Net loss$(2,254) $(1,804) $(5,119) $(4,194)
        
Other comprehensive loss:       
Foreign currency translation adjustments(2) (4) (2) (3)
Comprehensive loss$(2,256) $(1,808) $(5,121) $(4,197)


The accompanying notes are an integral part of these condensed consolidated financial statements. 

6

ENERGY FOCUS, INC.
CONDENSEDCONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
(in thousands)
(Unaudited)
Preferred
Stock		Common
Stock		Additional
Paid-in
Capital		Accumulated
Other
Comprehensive Loss		Accumulated
Deficit		Total
Stockholders'
Equity
SharesAmountSharesAmount
Balance at December 31, 2019  —  $—  12,428  $1  $128,872  $(3) $(124,874) $3,996  
Issuance of common stock under employee stock option and stock purchase plans—  —  27  —  —  —  —  —  
Issuance of common stock and warrants—  —  3,442  1  2,749  —  —  2,750  
Offering costs on issuance of common stock and warrants—  —  —  —  (474) —  —  (474) 
Warrant liability—  —  —  —  (1,636) —  —  (1,636) 
Conversion of notes to preferred stock2,709  —  —  —  1,769  —  —  1,769  
Stock-based compensation—  —  —  —  20  —  —  20  
Net loss for the three months ended March 31, 2020—  —  —  —  —  —  (541) (541) 
Balance at March 31, 2020  2,709  $—  15,897  $2  $131,300  $(3) $(125,415) $5,884  
  Common
Stock		 Additional
Paid-in
Capital		 Accumulated
Other
Comprehensive
Income (Loss)		 Accumulated
Deficit		 Total
Stockholders'
Equity
  Shares Amount        
             
Balance at December 31, 2017 11,869
 $1
 $127,493
 $2
 $(108,204) $19,292
Issuance of common stock under employee stock option and stock purchase plans 74
 —
 —
 —
 —
 —
Common stock withheld in lieu of income tax withholding on vesting of restricted stock units (12) —
 (32) —
 —
 (32)
Stock-based compensation —
 —
 195
 —
 —
 195
Foreign currency translation adjustment —
 —
 —
 1
 —
 1
Net loss for the three months ended March 31, 2018 —
 —
 —
 —
 (2,390) (2,390)
Balance at March 31, 2018 11,931
 $1
 $127,656
 $3
 $(110,594) $17,066
Issuance of common stock under employee stock option and stock purchase plans 119
 —
 22
 —
 —
 22
Common stock withheld in lieu of income tax withholding on vesting of restricted stock units (3) —
 (7) —
 —
 (7)
Stock-based compensation —
 —
 235
 —
 —
 235
Foreign currency translation adjustment —
 —
 —
 (4) —
 (4)
Net loss for the three months ended June 30, 2018 —
 —
 —
 —
 (1,804) (1,804)
Balance at June 30, 2018 12,047
 $1
 $127,906
 $(1) $(112,398) $15,508
             
Balance at December 31, 2018 12,091
 $1
 $128,367
 $(1) $(117,315) $11,052
Adjustment to beginning retained earnings upon adoption of Topic 842 —
 —
 —
 —
 (186) (186)
Issuance of common stock under employee stock option and stock purchase plans 150
 —
 —
 —
 —
 —
Common stock withheld in lieu of income tax withholding on vesting of restricted stock units (50) —
 (111) —
 —
 (111)
Stock-based compensation —
 —
 543
 —
 —
 543
Net loss for the three months ended March 31, 2019 —
 —
 —
 —
 (2,865) (2,865)
Balance at March 31, 2019 12,191
 $1
 $128,799
 $(1) $(120,366) $8,433
Issuance of common stock under employee stock option and stock purchase plans 179
 —
 —
 —
 —
 —
Common stock withheld in lieu of income tax withholding on vesting of restricted stock units —
 —
 (5) —
 —
 (5)
Stock-based compensation —
 —
 (20) —
 —
 (20)
Foreign currency translation adjustment —
 —
 —
 (2) —
 (2)
Net loss for the three months ended June 30, 2019 —
 —
 —
 —
 (2,254) (2,254)
Balance at June 30, 2019 12,370
 $1
 $128,774
 $(3) $(122,620) $6,152

The accompanying notes are an integral part of these condensed consolidated financial statements.

Common
Stock		Additional
Paid-in
Capital		Accumulated
Other
Comprehensive
Loss		Accumulated
Deficit		Total
Stockholders'
Equity
SharesAmount
Balance at December 31, 2018  12,091  $1  $128,367  $(1) $(117,315) $11,052  
Adjustment to beginning retained earnings upon adoption of Topic 842—  —  —  —  (186) (186) 
Issuance of common stock under employee stock option and stock purchase plans150  —  —  —  —  —  
Common stock withheld in lieu of income tax withholding on vesting of restricted stock units(50) —  (111) —  —  (111) 
Stock-based compensation—  —  543  —  —  543  
Net loss for the three months ended March 31, 2019—  —  —  —  (2,865) (2,865) 
Balance at March 31, 2019  12,191  $1  $128,799  $(1) $(120,366) $8,433  
ENERGY FOCUS, INC.
CONDENSEDCONSOLIDATED STATEMENTS OFCASH FLOWS
(in thousands)
(Unaudited)
 Six months ended
June 30,
 2019 2018
Cash flows from operating activities:   
Net loss$(5,119) $(4,194)
    
Adjustments to reconcile net loss to net cash used in operating activities:   
Depreciation200
 294
Stock-based compensation523
 430
Provision for doubtful accounts receivable38
 (11)
Provision for slow-moving and obsolete inventories and valuation reserves(303) (409)
Provision for warranties106
 15
Amortization of loan origination fees45
 —
Loss (gain) on dispositions of property and equipment15
 (15)
Changes in operating assets and liabilities:   
Accounts receivable358
 237
Inventories693
 388
Prepaid and other assets447
 (435)
Accounts payable(1,526) 1,471
Accrued and other liabilities(580) (79)
Deferred revenue(17) 8
Total adjustments(1) 1,894
Net cash used in operating activities(5,120) (2,300)
    
Cash flows from investing activities:   
Acquisitions of property and equipment(28) (57)
Proceeds from the sale of property and equipment—
 240
Net cash (used in) provided by investing activities(28) 183
    
Cash flows from financing activities:   
Proceeds from exercises of stock options and employee stock purchase plan purchases—
 21
Common stock withheld to satisfy income tax withholding on vesting of restricted stock units(116) (39)
Principal payments under finance lease obligations(1) —
Proceeds from convertible notes1,700
 —
Net repayments on credit line borrowings(568) —
Net cash provided by (used in) financing activities1,015
 (18)
    
Effect of exchange rate changes on cash5
 (7)
    
Net decrease in cash and cash equivalents(4,128) (2,142)
Cash and cash equivalents, beginning of period6,335
 10,761
Cash and cash equivalents, end of period$2,207
 $8,619
    
Classification of cash and cash equivalents:   
Cash and cash equivalents$1,865
 $8,277
Restricted cash held$342
 $342
Cash and cash equivalents, end of period$2,207
 $8,619

The accompanying notes are an integral part of these condensed consolidated financial statements.

7

ENERGY FOCUS, INC.
CONDENSEDCONSOLIDATED STATEMENTS OFCASH FLOWS
(in thousands)
(Unaudited)
Three months ended
March 31,
20202019
Cash flows from operating activities:
Net loss$(541) $(2,865) 
Adjustments to reconcile net loss to net cash provided by (used in) operating activities:
Depreciation46  105  
Stock-based compensation20  543  
Change in fair value of warrant liabilities(873) —  
Provision for doubtful accounts receivable(12) 26  
Provision for slow-moving and obsolete inventories(34) (836) 
Provision for warranties—  101  
Amortization of loan discounts and origination fees38  20  
Gain on dispositions of property and equipment—  (1) 
Changes in operating assets and liabilities:
Accounts receivable445  (210) 
Inventories1,546  643  
Prepaid and other assets(187) 459  
Accounts payable(152) (1,329) 
Accrued and other liabilities222  (195) 
Deferred revenue(14) (17) 
Total adjustments1,045  (691) 
Net cash provided by (used in) operating activities504  (3,556) 
Cash flows from investing activities:  
Acquisitions of property and equipment(47) (5) 
Proceeds from the sale of property and equipment—  1  
Net cash used in investing activities(47) (4) 
Cash flows from financing activities:
Proceeds from the issuance of common stock and warrants2,750  —  
Offering costs paid on the issuance of common stock and warrants(474) —  
Principal payments under finance lease obligations(1) (1) 
Common stock withheld in lieu of income tax withholding on vesting of restricted stock units—  (111) 
Payments on the Iliad Note(226) —  
Net proceeds from (payment on) credit line borrowings55  (462) 
Proceeds from convertible notes—  1,660  
Net cash provided by financing activities2,104  1,086  
Net increase (decrease) in cash and restricted cash2,561  (2,474) 
Cash and restricted cash, beginning of period692  6,335  
Cash and restricted cash, end of period$3,253  $3,861  
Classification of cash and restricted cash:      
Cash$2,911  $3,519  
Restricted cash held in other assets342  342  
Cash and restricted cash$3,253  $3,861  

The accompanying notes are an integral part of these condensed consolidated financial statements.
8
ENERGY FOCUS, INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2019March 31, 2020
(Unaudited)




NOTE 1. NATURE OFOPERATIONS


Energy Focus, Inc. and its subsidiary engage(“the Company”) engages in the design, development, manufacturing, marketing and sale of energy-efficient lighting systems.systems and controls. We develop, market and sell high quality energy-efficient light-emitting diode (“LED”) lighting products and controls in the commercial and military markets.maritime markets (“MMM”). Our mission is to enable our customers to run their facilities and offices with greater energy efficiency, productivity, and wellness through advanced LED retrofit solutions. Our goal is to be the retrofitLED lighting technology and market leader for the most demanding applications where performance, quality and health really matter.are considered paramount. We specialize in LED lighting retrofit by replacing fluorescent, lamps in institutional buildings and high-intensity discharge (“HID”) lighting and other types of lamps in low-bay and high-bayinstitutional buildings for primarily indoor lighting applications with our innovative, high-quality commercial and military tubular LED (“TLED”) and, as well as other LED products.products and controls.


Product development is a key focus for us. Our product development team is dedicated to developing and designing leading-edge technology LED lighting products based upon the voice of the customer.

NOTE 2.BASIS OF PRESENTATION ANDSUMMARY OF SIGNIFICANT ACCOUNTING POLICIES


Basis of presentation


The unaudited condensed consolidated financial statements include the accounts of the Company and its wholly-owned subsidiary Energy Focus LED Solutions, LLC, which is not active.in Taiwan during 2019. All significant inter-company balances and transactions have been eliminated. Unless indicated otherwise, the information in the accompanying financial statements and notesNotes to the unaudited condensed consolidated financial statementsConsolidated Financial Statements relates to our continuing operations.


We have prepared the accompanying financial data for the three and six months ended June 30,March 31, 2020 and 2019 and 2018 pursuant to the rules and regulations of the United States Securities and Exchange Commission (“SEC”). Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States (“U.S. GAAP”) have been condensed or omitted pursuant to such rules and regulations. The accompanying financial data and information should be read in conjunction with our Annual Report on Form 10-K for the year ended December 31, 20182019 (“20182019 Annual Report”). The Condensed Consolidated Balance Sheet as of December 31, 20182019 has been derived from the audited consolidated financial statements at that date but does not include all of the information and footnotes required by U.S. GAAP for complete financial statements.


In the opinion of management, the accompanying condensed consolidated financial statements contain all normal and recurring adjustments necessary to present fairly our Condensed Consolidated Balance Sheets as of June 30, 2019March 31, 2020 and December 31, 2018,2019, Condensed Consolidated Statements of Operations for the three and six months ended June 30,March 31, 2020 and 2019, and 2018, Condensed Consolidated Statements of Comprehensive Loss for the three and six months ended June 30,March 31, 2020 and 2019, and 2018, Condensed Consolidated Statements of Changes in Stockholders’ Equity for the three and six months ended June 30,March 31, 2020 and 2019, and 2018, and Condensed Consolidated Statements of Cash Flows for the sixthree months ended June 30, 2019March 31, 2020 and 2018.2019.

Other than the adoption of the new lease accounting standard, there have been no other material changes to our significant accounting policies, as compared to those described in our 2018 Annual Report.


Use of estimates


The preparation of financial statements in accordance with U.S. GAAP requires management to make estimates and assumptions that affect the amounts reported in our financial statements and accompanying notes. Management bases its estimates on historical experience and various other assumptions believed to be reasonable. Although these estimates are based on management’s best knowledge of current events and actions that may impact us in the future, actual results may vary from the estimates. Estimates include, but are not limited to, the establishment of reserves for accounts receivable, sales returns, inventory obsolescence and warranty claims; the useful lives of property and equipment; valuation allowance for net deferred

9
ENERGY FOCUS, INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2019
(Unaudited)


taxes; the cost and offsetting income related to subleased property; and stock-based compensation. In addition, estimates and assumptions associated with the determination of the fair value of financial instruments and evaluation of long-lived assets for impairment requires considerable judgment. Actual results could differ from those estimates and such differences could be material.

Reclassifications

Certain amounts related to warranty accruals and settlements were reclassified to conform to current period reporting presentation with no impact on financial position, loss from operations or cash used in operations.


Certain risks and concentrations


We have certain customers whose net sales individually represented 10 percent10% or more of our total net sales, or whose net trade accounts receivable balance individually represented 10 percent10% or more of our total net trade accounts receivable, as follows:


9
ENERGY FOCUS, INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2020
(Unaudited)
For the three months ended June 30, 2019,March 31, 2020, sales to our primary distributor for the U.S. Navy and a regional commercial lighting retrofit company located in Texas accounted for approximately 13 percent38% and 26 percent15% of net sales, respectively. When sales to our primary distributor for the U.S. Navy are combined with sales to a shipbuildershipbuilders for the U.S. Navy, total net sales of products for the U.S. Navy comprised approximately 20 percent46% of net sales for the same period. For the three months ended June 30, 2018,March 31, 2019, sales to our primary distributor for the U.S. Navy a global healthcare provider located in Northeast Ohio, and a regional commercial lighting retrofit company located in Texas accounted for approximately 29 percent, 15 percent22% and 11 percent30% of net sales, respectively. When sales to our primary distributor for the U.S. Navy are combined with sales to a shipbuildershipbuilders for the U.S. Navy, total net sales of products for the U.S. Navy comprised approximately 33 percent32% of net sales for the same period.

For the six months ended June 30, 2019, sales to our primary distributor for the U.S. Navy and a regional commercial lighting retrofit company located in Texas accounted for approximately 17 percent and 28 percent of net sales, respectively. When sales to our primary distributor for the U.S. Navy are combined with sales to a shipbuilder for the U.S. Navy, total net sales of products for the U.S. Navy comprised approximately 26 percent of net sales for the same period. For the six months ended June 30, 2018, sales to our primary distributor for the U.S. Navy and a global healthcare provider located in Northeast Ohio accounted for approximately 37 percent and 12 percent of net sales, respectively. When sales to our primary distributor for the U.S. Navy are combined with sales to a shipbuilder for the U.S. Navy, total net sales of products for the U.S. Navy comprised approximately 41 percent of net sales for the same period.


A regional commercial lighting retrofit company located in Texas and our primary distributor for the U.S. Navy accounted for approximately 26 percent12% and 13 percent44% of net trade accounts receivable, respectively, at June 30, 2019.March 31, 2020. At December 31, 2018,2019, our primary distributor for the U.S. Navy accounted for approximately 40 percent10% of net trade accounts receivable and a large regional retrofit company accounted for 41% of our net trade accounts receivable.


Recent accounting pronouncements


In August 2018,June 2016, the Financial Accounting Standards Board (“FASB)FASB”) issued Accounting StandardsStandard Update (“ASU”) No. 2018-15, Intangibles--Goodwill and Other--Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract, which aligns the requirements for capitalizing implementation costs in a cloud computing service contract with the requirements for capitalizing implementation costs incurred for an internal-use software license. This standard will be effective for interim and annual periods beginning after December 15, 2019. We do not expect the adoption of this guidance to have a significant impact on our financial position, results of operations or cash flows.

In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments,, which significantly changes the accounting for credit losses on instruments within its scope. The new guidance introduces an approach based on expected losses to estimate credit losses on certain financial instruments,

10
ENERGY FOCUS, INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2019
(Unaudited)


including trade receivables, and requires an entity to recognize an allowance based on its estimate of expected credit losses rather than incurred losses. ThisFor smaller reporting companies, this standard will be effective for interim and annual periods beginningstarting after December 15, 2019,2022 and will generally require adoption on a modified retrospective basis. We are in the process of evaluating the impact of the standard.

Adoption of recent accounting pronouncement

In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842), which supersedes the current lease accounting requirements. Additionally, in July 2018, the FASB issued ASU No. 2018-11, Leases (Topic 842): Targeted Improvements, which simplifies adoption of Topic 842 by allowing an additional transition method that will not require restatement of prior periods and providing a new practical expedient for lessors to avoid separating lease and non-lease components within a contract if certain criteria are met (provisions of which must be elected upon adoption of Topic 842). The new standard requires a lessee to record on the balance sheet the assets and liabilities for the rights and obligations created by leases with lease terms of more than 12 months. It also requires lessees to disclose certain key information about lease transactions. Upon implementation, an entity’s lease payment obligations will be recognized at their estimated present value along with a corresponding right-of-use asset. Lease expense recognition will be generally consistent with current practice.

The Company adopted this guidance as of January 1, 2019 using the required modified retrospective method with the non-comparative transition option. The Company applied the transitional package of practical expedients allowed by the standard to not reassess the identification, classification and initial direct costs of leases commencing before this ASU’s effective date. The Company also applied the lease term and impairment hindsight transitional practical expedients. The Company has chosen to apply the following accounting policy practical expedients: to not separate lease and non-lease components to new leases as well as existing leases through transition; and the election to not apply recognition requirements of the guidance to short-term leases.

The results for reporting periods beginning on or after January 1, 2019 are presented under Topic 842, while prior period amounts are not adjusted and continue to be reported in accordance with legacy generally accepted accounting principles.

On adoption, we recognized additional operating lease liabilities of approximately $2.9 million, with corresponding right-of-use assets based on the present value of the remaining minimum rental payments for our existing operating leases. The operating lease right-of-use assets recorded upon adoption were offset by the carrying value of liabilities previously recorded under Accounting Standards Codification (“ASC”) Topic 420, Exit or Disposal Cost Obligations (“Topic 420”) and impairment charges totaling $273 thousand and $186 thousand, respectively. Refer to Note 6, “Leases” below for additional disclosures relating to the Company’s leasing arrangements.


Revenue

On January 1, 2018, we adopted ASU No. 2014-09, Revenue from Contracts with Customers (Topic 606), as amended by subsequently issued additional guidance (together, “Topic 606”) using the modified retrospective method. The adoption of Topic 606 did not have a material impact on our consolidated financial position or results of operations, as our revenue arrangements generally consist of a single performance obligation to transfer promised goods at a fixed price.


11
ENERGY FOCUS, INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2019
(Unaudited)



Net sales include revenues from sales of products and shipping and handling charges, net of estimates for product returns. Revenue is measured at the amount of consideration we expect to receive in exchange for the transferred products. We recognize revenue at the point in time when we transfer the promised products to the customer and the customer obtains control over the products. Distributors’ obligations to us are not contingent upon the resale of our products. We recognize revenue for shipping and handling charges at the time the goods are shipped to the customer, and the costs of outbound freight are included in cost of sales, as we have elected the practical expedient included in Topic 606.sales. We provide for product returns based on historical return rates. While we incur costs for sales commissions to our sales employees and outside agents, we recognize commission costs concurrent with the related revenue, as the amortization period is less than one year and we have elected the practical expedient included in Topic 606.year. We do not incur any other incremental costs to obtain contracts with our customers. Our product warranties are assurance-type warranties, which promise the customer that the products are as specified in the contract. Therefore, the product warranties are not a separate performance obligation and are accounted for as described below. Sales taxes assessed by governmental authorities are accounted for on a net basis and are excluded from net sales.


The following table provides a disaggregation of product net sales for the periods presented (in thousands):

Three months ended
June 30,		 Six months ended
June 30,		Three months ended
March 31,
2019 2018 2019 2018 20202019
Net sales:       Net sales:  
Commercial$2,131
 $2,972
 $4,114
 $5,177
Commercial$1,736  $1,983  
Military951
 2,200
 2,145
 4,654
MMM productsMMM products2,047  1,194  
Total net sales$3,082
 $5,172
 $6,259
 $9,831
Total net sales$3,783  $3,177  


Accounts Receivable


Our trade accounts receivable consists of amounts billed to and currently due from customers. Our customers are concentrated in the United States. In the normal course of business, we extend unsecured credit to our customers related to the sale of our products. Credit is extended to customers based uponon an evaluation of the customer’s financial condition and
10
ENERGY FOCUS, INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2020
(Unaudited)
the amounts due are stated at their estimated net realizable value. During the first eleven months of 2019 we evaluated and monitored the creditworthiness of each customer on a case-by-case basis. However, during December 2019 we transitioned to an account receivable insurance program with a high credit worthy insurance company where we have the large majority of the accounts receivable insured with a portion of self-retention. This third party also provides credit-worthiness ratings and metrics that significantly assists us in evaluating the credit worthiness of both existing and new customers. We maintain an allowanceallowances for sales returns and doubtful accounts receivable to provide for the estimated amountnumber of account receivables that will not be collected. The allowance is based on an assessment of customer creditworthiness and historical
payment experience, the age of outstanding receivables, and performance guarantees to the extent applicable. Past due amounts are written off on an actual basis when our internal collection efforts have been unsuccessful. unsuccessful, and payments subsequently received on such receivables are credited to the allowance for doubtful accounts. We do not generally require collateral from our customers.

Our standard payment terms with customers are net 30 days from the date of shipment, and we do not generally offer extended payment terms to our customers, but exceptions are made in some cases to majorcertain customers or with particular orders. Accordingly, we do not adjust trade accounts receivable for the effects of financing, as we expect the period between the transfer of product to the customer and the receipt of payment from the customer to be in line with our standard payment terms.


Geographic information


Approximately 97 percentAll of our long-lived fixed assets are located in the United States, with the remainder located in our recently closed product development center in Taiwan. There were no net salesStates. Sales attributable to customers outside the United States for both the three months ended June 30,March 31, 2020 and 2019 and such sales were approximately 5 percentless than 1% of net sales for the three months ended June 30, 2018. Net sales attributable to customers outside the United States accounted for less than one percent and three percent of our total net sales for the six months ended June 30, 2019 and 2018, respectively.sales. The geographic location of our net sales is derived from the destination to which we ship the product.


Net loss per share


Basic loss per share is computed by dividing net loss available to common stockholders by the weighted average number of common shares outstanding during the period, excluding the effects of any potentially dilutive securities. Diluted loss per share

12
ENERGY FOCUS, INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2019
(Unaudited)


gives effect to all dilutive potential common shares outstanding during the period. Dilutive potential common shares consist of incremental shares upon the exercise of stock options or release of restricted stock unitsand warrants, unless the effect would be anti-dilutive.


The following table presents a reconciliation of basic and diluted loss per share computations (in thousands):

Three months ended
March 31,
 20202019
Numerator:  
Net loss$(541) $(2,865) 
  
Denominator:
Basic weighted average common shares outstanding15,430  12,126  

As a result of the net loss we incurred for the three and six months ended June 30,March 31, 2020 and 2019, options, warrants and convertible securities representing approximately 8 thousand and 28 thousand and 66 thousand potentially dilutive equity awards, respectively,shares of common stock were excluded from the net loss per share calculation, asrespectively, because their inclusion would have been anti-dilutive. As a result of the net loss we incurred for the three and six months ended June 30, 2018, approximately 87 thousand and 83 thousand potentially dilutive equity awards, respectively, were excluded from the net loss per share calculation for this same reason. Therefore, for the three and six months ended June 30, 2019 and 2018, the basic weighted average shares outstanding were used in calculating diluted loss per share.

The following is a reconciliation of the numerator and denominator of the basic and diluted net loss per share computations for the periods presented below (in thousands):


11
 Three months ended
June 30,		 Six months ended
June 30,
 2019 2018 2019 2018
Numerator:       
Net loss$(2,254) $(1,804) $(5,119) $(4,194)
        
Denominator:       
Basic weighted average common shares outstanding12,336
 11,949
 12,231
 11,925
Potential common shares from equity awards and warrants—
 —
 —
 —
Diluted weighted average shares12,336
 11,949
 12,231
 11,925
ENERGY FOCUS, INC.

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2020
(Unaudited)
Product warranties


Through March 31, 2016, we warranted finished goods against defects in material and workmanship under normal use and service for periods generally between one and five years. Beginning April 1, 2016, we warrant our commercial Tubular LED tubes, globes, andLamps, (“ TLEDs”), excluding RedCap®, our Battery Backup TLED, the troffer luminaires, and certain Globe Lights for a period of ten years and all glass tubesother LED products for five years per the Terms and fixturesConditions outlined on our website. Beginning in October 2019, TLEDs (excluding Red Caps®) are warranted for ten years and the warranty for all of our other products is five years. Warranty settlement costs consist of actual amounts expensed for warranty, which are largely a result of the cost of replacement products provided to our customers. A liability for the estimated future costs under product warranties is maintained for products under warranty based on the actual claims incurred to date and the estimated nature, frequency, and costs of future claims. These estimates are inherently uncertain and changes to our historical or projected experience may cause material changes to our warranty reserves in the future. We continuously review the assumptions related to the adequacy of our warranty reserve, including product failure rates, and make adjustments to the existing warranty liability when there are changes to these estimates or the underlying replacement product costs, or the warranty period expires. The following table summarizes warranty activity for the periods presented (in thousands):


Three months ended
March 31,
20202019
Balance at beginning of period$195  $258  
Warranty accruals for current period sales7  12  
Adjustments to existing warranties44  89  
In kind settlements made during the period(6) (7) 
Accrued warranty reserve$240  $352  

Financial Instruments

In January 2020, we completed a registered direct offering for the sale of3,441,803 shares of our common stock to certain institutional investors, at a purchase price of $0.674 per share. We also sold, to the same institutional investors, warrants to purchase up to 3,441,803 shares of common stock at an exercise price of $0.674 per share in a concurrent private placement for a purchase price of $0.125 per warrant. We paid the placement agent commissions of $193 thousand plus $50 thousand in expenses in connection with the registered direct offering and the concurrent private placement, and we also paid legal, accounting and other fees of $231 thousand related to the offering. Total offering costs of $474 thousand have been presented as a reduction of additional paid-in capital and have been netted within equity. In addition, we issued warrants to the placement agent to purchase up to 240,926 shares of common stock at an exercise price of $0.9988 per share. Net proceeds to us from the sale of common stock and warrants (the “January 2020 Equity Offering”) were approximately $2.3 million. In accordance with the terms of the Iliad Note, 10% of the gross proceeds from the January 2020 Equity Offering ($275 thousand) were used to make payments on the Iliad Note, of which $226 thousand went towards the outstanding principal amount.

The warrants have been classified as liabilities, as opposed to equity, due to the potential adjustment to the exercise price that could result upon late delivery of the shares or potential cash settlement and are recorded at their fair values at each balance sheet date. Please also refer to Note 9, “Stockholder’s Equity”.

Fair Value Measurements

The fair value hierarchy prioritizes the inputs to valuation techniques used to measure fair value, giving the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurements) and the lowest priority
12
 Three months ended
June 30,		 Six months ended
June 30,
 2019 2018 2019 2018
Balance at beginning of period$352
 $141
 $258
 $174
Warranty accruals for current period sales17
 7
 29
 15
Adjustments to existing warranties(12) 55
 77
 54
In kind settlements made during the period(15) (7) (22) (47)
Accrued warranty reserve$342
 $196
 $342
 $196

13
ENERGY FOCUS, INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2019March 31, 2020
(Unaudited)


to unobservable inputs (Level 3 measurements). The three levels of the fair value hierarchy are described below. We classify the inputs used to measure fair value into the following hierarchy:


Level 1Unadjusted quoted prices in active markets for identical assets or liabilities.
Level 2Unadjusted quoted prices in active markets for similar assets or liabilities, or unadjusted quoted prices for identical or similar assets or liabilities in markets that are not active, or inputs other than quoted prices that are observable for the asset or liability.
Level 3Unobservable inputs for the asset or liability.

The following table provides a summary of the financial assets and liabilities measured at fair value on a recurring basis as of March 31, 2020 (in thousands):

Fair Value Measurements at March 31, 2020 Using
Balance as ofQuoted Prices in Active Markets for Identical Assets
(Level 1)		Significant Other Observable Inputs
(Level 2)		Significant Unobservable Inputs
(Level 3)
DescriptionMarch 31, 2020
Warrant liabilities$763  $—  $—  $763  

A financial instrument’s level within the fair value hierarchy is based on the lowest level of any input that is significant to the fair value measurement. In determining the appropriate levels, we perform a detailed analysis of the assets and liabilities whose fair value is measured on a recurring basis. We review and reassess the fair value hierarchy classifications on a quarterly basis. Changes from one quarter to the next related to the observability of inputs in a fair value measurement may result in a reclassification between fair value hierarchy levels. There were no reclassifications for all periods presented.

The estimated fair value of warrants accounted for as liabilities, representing a level 3 fair value measure, was determined on the issuance date and subsequently marked to market at each financial reporting date. We use the Black-Scholes valuation model to value the warrant liabilities at fair value. The fair value is estimated using the expected volatility based on our historical volatility and is determined using probability weighted-average assumptions, when appropriate.

The following inputs were used at March 31, 2020:
ExpectedRisk-FreeExpected
VolatilityInterest RateLife
Warrants with greater than one-year remaining term97.05%0.34% - 0.36%4.29 - 4.79 years

A roll-forward of fair value measurements using significant unobservable inputs (Level 3) for the warrants is as follows (in thousands):
Three months ended
March 31, 2020
Balance January 1, 2020$— 
Issuance of warrants January 20201,636 
Income from change in fair value of warrants(873)
Balance March 31, 2020$763 


NOTE 3. RESTRUCTURING


During the first half of 2019, we implemented phased actions to reduce costs in order to minimize cash usage while continuing to pursue strategic alternatives. The actions taken were limited to an initial phase while the options under strategic review were considered and evaluated, including the issuance of subordinated convertible notes as discussed in Note 7, “Debt.”

Our initial actions included the elimination of twelve positions (three during the first quarter of 2019 and nine during the second quarter of 2019), costs associated with closing our offices in San Jose, California and Taipei, Taiwan during the first half of 2019, restructuring of the sales organization and incentive plan, flattening of the senior management team, additional operational streamlining, management compensation reductions, and outsourcing of certain functions including warehousing and marketing. In connection with these actions, we recorded severance and related benefits charges of $0.1 million during the first quarter of 2019 and $0.1 million duringFor the three months ended June 30, 2019.

For the six months ended June 30, 2018,March 31, 2020, we recorded net restructuring credits totalingof approximately $(47)$14 thousand, primarily related to the revision of our initial estimates of the costcosts and offsetting sublease income and accretion expense for the remaining lease obligationsobligation for theour former New York, New York and Arlington, Virginia offices.office. For additional information regarding the restructuring actions taken as part of the 2017 and 2019 restructuring plan,plans, please refer to Note 3, “Restructuring,” included under Item 8 of our 20182019 Annual Report.


Our restructuring liabilities consist of estimated ongoing costs related to long-term operating lease obligations, which the Company has exited. The recorded value of the ongoing lease obligations is based on the remaining lease term and payment amount, discounted to present value. Changes in subsequent periods resulting from a revision to either the timing or the
13
ENERGY FOCUS, INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2020
(Unaudited)
amount of estimated cash flows over the future period are measured using the credit adjusted, risk free rate that was used to measure the restructuring liabilities initially. Please also refer to Note 6, “Leases” as certain amounts formerly included below in the restructuring reserve as of December 31, 2018, have been reclassified on the balance sheet to be shown netted against the restructured lease, right-of-use asset in accordance with Topic 842..


The following is a reconciliation of the beginning and ending balances of our restructuring liability as it relates to the 2017 and 2019 restructuring planplans (in thousands):

Restructuring Liability
Balance at December 31, 2019$38 
Accretion of lease obligations1 
Payments(8)
Balance at March 31, 202031 
 Facilities
Balance at December 31, 2018$350
Accretion of lease obligations3
Reclassification upon adoption of Topic 842(273)
Payments(24)
Balance at June 30, 2019$56


The following is a reconciliation of the ending balance of our restructuring liability at June 30, 2019March 31, 2020 to the balance sheet:


Restructuring Liability
Balance at March 31, 2020$31 
Less, short-term restructuring liability24 
Long-term restructuring liability, included in other liabilities$7 
 Restructuring Liability
Balance at June 30, 2019$56
Less, short-term restructuring liability28
Long-term restructuring liability, included in other liabilities$28


14
ENERGY FOCUS, INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2019
(Unaudited)


At June 30, 2019 we had $2.2 million in cash and cash equivalents, which includes $0.3 million restricted cash held, and total debt of $3.4 million, including $1.7 million outstanding on the revolving credit facility we entered into on December 11, 2018 and $1.7 million in subordinated convertible notes we entered into on March 29, 2019. Please refer to Note 7, “Debt” for more information on the additional financing we received on March 29, 2019 to fund our near-term operations.


As a result of the restructuring actions and initiatives described above, we have reduced our operating expenses to be more commensurate with our sales volumes, however,volumes. However, we continue to incur losses and have a substantial accumulated deficit, and
substantial doubt about our ability to continue as a going concern continues to exist at June 30, 2019.March 31, 2020.


Since the executive transition on April 1, 2019, we have continued to evaluate and assess strategic options as we seek to achieve a profitable business model and maximize value for our stockholders. Our plansprofitability. We plan to achieve profitability includethrough growing our sales by continuing to develop new technologies into sustainable product linesexecute on our multi-channel sales strategy that allow us to effectively compete to expand our customer base, executetargets key verticals such as government, healthcare, education and commercial and industrial, complemented by our marketing outreach campaigns, channel partnerships, and additional sales plans, evaluatefrom a new e-commerce platform, which we plan to launch in the second quarter of 2020. We also plan to continue to develop advanced lighting and lighting control technologies and introduce impactful new products such as the EnFocus™, a breakthrough lighting control platform we officially launched during the second quarter of 2020. In addition, we continue to apply rigorous and financial disciplines in our optimal organizational structure, business processes and continue to improve ourpolicies, and supply chain practices to help accelerate our path towards profitability.

As described in Note 9, we also raised approximately $2.3 million of net proceeds upon the issuance of common stock and organizational structure. warrants under the January 2020 Equity Offering

The restructuring and cost cutting initiatives implemented during 2017 and 2019 as well as the January 2020 equity offering that significantly strengthened our balance sheet were designed to allow us to effectively execute this strategy; however,these strategies. However, our efforts may not occur as quickly as we envision or be successful, due to the long sales cycle in our industry, the corresponding time required to ramp up sales from new products and markets into this sales cycle, the timing of introductions of additional new products, significant competition, and potential sales volatility given our customer concentration, and the recent and lingering economic impact from COVID-19 pandemic, among other factors. As a result, we will continue to review and pursue selected external funding sources to ensure adequate financial resources to execute across the timelines required to achieve these objectives including, but not limited to, the following:


•obtaining financing from traditional or non-traditional investment capital organizations or individuals; and
•obtaining funding from the sale of our common stock or other equity or debt instruments.instruments; and

•obtaining debt financing with lending terms that more closely match our business model and capital needs.

There can be no assurance that we will obtain funding on acceptable terms, in a timely fashion, or at all. Obtaining additional funding contains risks, including:


•additional equity financing may not be available to us on satisfactory terms and any equity we are able to issue could lead to dilution for current stockholders and have rights, preferences and privileges senior to
14
ENERGY FOCUS, INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2020
(Unaudited)
our common stock;
•loans or other debt instruments may have terms and/or conditions, such as interest rate, restrictive covenants, conversion features, refinancing demands, and control or revocation provisions, which are not acceptable to management or our board of directors; and
•the current environment in capital markets combined with our capital constraints may prevent us from being able to obtain adequate debt financing.


If we fail to obtain the required additional financing to sustain our business before we are able to produce levels of revenue to meet our financial needs, we will need to delay, scale back or eliminate our business plan and further reduce our operating costs and headcount, each of which would have a material adverse effect on our business, future prospects, and financial condition. A lack of additional funding could also result in our inability to continue as a going concern and force us to sell certain assets or discontinue or curtail our operations and, as a result, investors in the Company could lose their entire investment.


Considering both quantitative and qualitative information, we continue to believe that the combination of our plans to obtain additional external funding restructuring, timely reorganizational actions, current financial position, liquid resources, obligations due or anticipated within the next year, executive reorganization, development and implementation of an excess inventory reduction plan, application and implementationsuccessful acquisition of a Payroll Protection Plan (“PPP”) loan during April 2020, plans and initiatives in our R&D, product development and sales and marketing, development of potential channel strategy,partnerships, if adequately executed, will provide us with an ability to finance our operations through 2020the next twelve months and will mitigate the substantial doubt about our ability to continue as a going concern.


On May 15, 2019, we received a letter from the Nasdaq Stock Market (“Nasdaq”NASDAQ”) advising us that for 30 consecutive trading days preceding the date of the letter, the bid price of our common stock had closed below the $1.00 per share minimum required for continued listing on the The Nasdaq Capital MarketNASDAQ pursuant to listing rules, and thereforerules. Therefore, we could be subject to delisting if we did not regain compliance within the compliance period (oror extend the compliance period as may be extended). We continue to monitor and evaluate our options to cure this deficiency within the compliance period.

by filing for an extension. On August 23,October 15, 2019, the Company receivedformally requested a notification dated August 21,180-day extension beginning November 12, 2019 and is evaluating options to regain compliance.

On April 16, 2020, NASDAQ announced that, in response to the COVID-19 pandemic and related extraordinary market conditions, it is providing temporary relief through June 30, 2020 from, among other rules, the Nasdaq informing the Company that it was not in$1.00 minimum bid price rule. As a result, Energy Focus has until July 24, 2020 to come into compliance with Nasdaq Listing Rule 5250(c)(1)the $1.00 minimum bid price rule. Energy Focus is evaluating its options to come into compliance, including, in the discretion of its board of directors, effectuating a reverse stock split of its common stock at a ratio of at least 1-for-2 and up to 1-for-20, which requires listed companies to timely file all required

15
ENERGY FOCUS, INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2019
(Unaudited)


periodic financial reports with the SEC. The Nasdaq notification letter specifies that the Companydiscretionary reverse stock split has 60 calendar days, or untilbeen approved by Energy Focus’ stockholders, provided it occurs no later than October 21, 2019, to submit a plan to regain compliance with the Listing Rule. The Company has since filed this Quarterly Report and is now in compliance as of the date of the filing of this Quarterly Report.June 17, 2020.



NOTE 4. INVENTORIES


Inventories are stated at the lower of standard cost (which approximates actual cost determined using the first-in, first-out cost method) or net realizable value, and consist of the following (in thousands):


March 31,
2020		December 31,
2019
Raw materials$3,019  $4,064  
Finished goods5,248  5,749  
Reserves for excess, obsolete, and slow-moving inventories(3,567) (3,645) 
Inventories, net$4,700  $6,168  


15
 June 30,
2019		 December 31,
2018
Raw materials$4,285
 $4,041
Finished goods7,292
 8,229
Reserves for excess, obsolete, and slow-moving inventories and valuation reserves - Raw Materials(1,132) (1,261)
Reserves for excess, obsolete, and slow-moving inventories and valuation reserves - Finished Goods(2,778) (2,951)
Inventories, net$7,667
 $8,058
ENERGY FOCUS, INC.

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2020
(Unaudited)
NOTE5.PROPERTY AND EQUIPMENT AND ASSETS HELD FOR SALE


Property and equipment are stated at cost and depreciated using the straight-line method over the estimated useful lives of the related assets and consist of the following (in thousands):


March 31,
2020		December 31,
2019
Equipment (useful life 3 to 15 years)$1,297  $1,297  
Tooling (useful life 2 to 5 years)203  203  
Vehicles (useful life 5 years)47  47  
Furniture and fixtures (useful life 5 years)137  137  
Computer software (useful life 3 years)1,028  1,028  
Leasehold improvements (the shorter of useful life or lease life)211  211  
Finance lease right-of-use asset13  13  
Projects in progress95  48  
Property and equipment at cost3,031  2,984  
Less: accumulated depreciation(2,641) (2,595) 
Property and equipment, net$390  $389  
 June 30,
2019		 December 31,
2018
Equipment (useful life 3 to 15 years)$1,451
 $1,511
Tooling (useful life 2 to 5 years)394
 371
Vehicles (useful life 5 years)47
 47
Furniture and fixtures (useful life 5 years)137
 137
Computer software (useful life 3 years)1,043
 1,043
Leasehold improvements (the shorter of useful life or lease life)211
 211
Finance lease right-of-use asset13
 —
Projects in progress45
 55
Property and equipment at cost3,341
 3,375
Less: accumulated depreciation(2,919) (2,765)
Property and equipment, net$422
 $610


Depreciation expense was $0.1 million for each of the three months ended June 30, 2019$46 thousand and 2018. Depreciation expense was $0.2 million and $0.3 million, respectively, for the six months ended June 30, 2019 and 2018.

During the first quarter of 2018, we completed the sale of the equipment that we previously classified as held for sale. We received net proceeds from the sale of $0.2 million and recognized a gain on the sale of approximately $18$105 thousand for the three months ended March 31, 2018. The gain on the sale is classified on our Condensed Consolidated Statements of Operations under the caption, “Other (income) expense.”2020 and 2019, respectively.



NOTE 6. LEASES


The Company leases certain equipment, manufacturing, warehouse and office space under non-cancellable operating leases expiring through 2024 under which it is responsible for related maintenance, taxes and insurance. The Company has one finance lease containing a bargain purchase option upon expiration of the lease in 2022. The lease term consists of the non-cancellable period of the lease, periods covered by options to extend the lease if the Company is reasonably certain to exercise the option, and periods covered by an option to terminate the lease if the Company is reasonably certain not to exercise the

16
ENERGY FOCUS, INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2019
(Unaudited)


option. The present value of the remaining lease obligation for these leases was calculated using an incremental borrowing rate (“IBR”) of 7.25%, which was the Company’s borrowing rate on theits revolving credit agreement signed on December 11, 2018. The weighted average remaining lease term for operating, restructuring and finance leases is three2.3 years, two1.3 years, and three2.0 years, respectively.
The Company has twohad one restructured leaseslease with sub-lease components for the New York, New York and Arlington, Virginia offices that were closed in 2017. The New York, New York lease expires in 2021 and the Arlington, Virginia lease expires in 2019. At the “cease use” date in 2017, the Company recorded the present value of the future minimum payments under the leases and costs that continue to be incurred with no economic benefit to the Company in accordance with Topic 420. The Company entered into sub-leases for both offices and included the estimated sub-lease payments as an offset to the remaining lease obligations, as required by Topic 420. In adopting Topic 842, the carrying value of the aforementioned net liabilities has been reclassified as a reduction of the restructured lease, right-of-use asset, which totaled $273 thousand as of January 1, 2019. As part of the lease agreementcomponent for the New York, New York office that was closed in 2017. The lease expires in 2021. As part of the lease agreement there iswas $0.3 million in a restricted cash account held at Key Bankin other long-term assets on the accompanying Condensed Consolidated Balance Sheets as of March 31, 2020 and December 31, 2019 which represents collateral against the related Letterletter of Creditcredit issued as part of this agreement.

The restructured leaseslease and sub-leasessub-lease were not scoped out of the requirements of Topic 842 and were evaluated for impairment in accordance with the asset impairment provisions of ASC 360, Property, Plant and Equipment (“Topic 360”). The Company concluded its net right-of-use assets were not impaired.impaired and the carrying amount approximates expected sublease income in future years as of March 31, 2020. The Company continues to carry certain immaterial operating expenses associated with these leasesthis lease as restructuring liabilities and will continue to accrete those liabilities in accordance with Topic 420, as has been done since the cease use date in 2017.
Due For additional information regarding treatment of leases please refer to the continued net losses, going concern, andNote 6 “Leases.” included under Item 8 of our 2019 restructuring actions discussed in Note 3, “Restructuring,” the Company also evaluated its Solon, Ohio operating lease right-of-use asset for potential impairment under Topic 360. As a result of this evaluation, the Company determined that the operating lease right-of-use asset for the Solon, Ohio operating lease was impaired upon the adoption of Topic 842. Therefore, the Company recorded an impairment of this right-of-use asset of approximately $0.2 million, with a corresponding offset to accumulated deficit as of January 1, 2019.
Components of the operating, restructured and finance lease costs for the three and six months ended June 30, 2019, were as follows (in thousands):Annual Report.
16
  Three months ended June 30, Six months ended June 30,
  2019 2019
     
Operating lease cost    
   Sublease income $(25) $(50)
   Lease cost 171
 318
      Operating lease cost, net 146
 268
     
Restructured lease cost    
   Sublease income (111) (223)
   Lease cost 107
 216
      Restructured lease cost, net (4) (7)
     
Finance lease cost    
   Interest on lease liabilities 1
 1
      Finance lease cost, net 1
 1
     
Total lease cost, net $143
 $262

17
ENERGY FOCUS, INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2019March 31, 2020
(Unaudited)


Components of the operating, restructured and finance lease costs recognized in net loss for the three months ended March 31, 2020 and 2019, were as follows (in thousands):
Three months ended March 31,
 20202019
Operating lease cost (income):
Sublease income$(25) $(25) 
Lease cost152  147  
Operating lease cost, net127  122  
Restructured lease cost (income):
Sublease income(68) (112) 
Lease cost61  109  
Restructured lease cost, net(7) (3) 
Finance lease cost
Interest of lease liabilities—  1  
Finance lease cost, net—  1  
Total lease cost, net$120  $120  

Supplemental balance sheet information related to the Company’s operating and finance leases as of June 30,March 31, 2020 and December 31, 2019 are as follows (in thousands):
 March 31, 2020December 31, 2019
Operating Leases
Operating lease right-of-use assets$1,179  $1,289  
Restructured lease right-of-use assets268  322  
Operating lease right-of-use assets, total1,447  1,611  
Operating lease liabilities1,337  1,480  
Restructured lease liabilities410  488  
Operating lease liabilities, total1,747  1,968  
Finance Leases
Property and equipment13  13  
Allowances for depreciation(7) (5) 
Finance lease assets, net6  8  
Finance lease liabilities6  6  
Total finance lease liabilities$6  $6  

17
   June 30,
   2019
    
Operating Leases   
Operating lease right-of-use assets  $1,541
Restructured lease right-of-use assets  469
   Operating lease right-of-use assets, total  2,010
    
Operating lease liabilities  1,741
Restructured lease liabilities  688
   Operating lease liabilities, total  2,429
    
Finance Leases   
Property and equipment  13
Allowances for depreciation  (5)
   Finance lease assets, net  8
    
Finance lease liabilities  8
        Total finance lease liabilities  $8
ENERGY FOCUS, INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2020
(Unaudited)
Future minimum lease payments required under operating, restructured and finance leases for each of the 12-month rolling periods below in effect at June 30, 2019March 31, 2020 are as follows:follows (in thousands):
Operating LeasesRestructured LeasesRestructured Leases Sublease PaymentsFinance Lease
April 2020 to March 2021$621  $342  $(273) $3  
April 2021 to March 2022644  86  (68) 3  
April 2022 to March 2023172  —  —  —  
April 2023 to March 202413  —  —  —  
Total future undiscounted lease payments1,450  428  (341) 6  
Less imputed interest(113) (18) 14  —  
Total lease obligations$1,337  $410  $(327) $6  
   Operating LeasesRestructured LeasesRestructured Leases Sublease Payments Finance Lease
July 2019 to June 2020  $637
$391
$(316) 3
July 2020 to June 2021  637
342
(273) 3
July 2021 to June 2022  637
—
—
 2
July 2022 to June 2023  15
—
—
 —
July 2023 to June 2024  9
—
—
 —
Total future undiscounted lease payments  1,935
733
(589)
8
Less imputed interest  (194)(45)36
 —
Total lease obligations  $1,741
$688
$(553) $8





18
ENERGY FOCUS, INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2019
(Unaudited)



Supplemental cash flow information related to leases for the sixthree months ended June 30,March 31, 2020 and 2019, was as follows (in thousands):
Three months ended March 31,
 20202019
Supplemental cash flow information 
Cash paid, net, for amounts included in the measurement of lease liabilities:
Operating cash flows from operating leases$135  $122  
Operating cash flows from restructured leases$17  $(3) 
Financing cash flows from finance leases$1  $1  
   Six months ended June 30,
   2019
Supplemental cash flow information   
Cash paid, net, for amounts included in the measurement of lease liabilities:   
Operating cash flows from operating leases  $268
Operating cash flows from restructured leases  $47
Financing cash flows from finance leases  $1


NOTE 7. DEBT


Credit facilityfacilities


As of June 30, 2019, borrowingsBorrowings under ourthe Company’s revolving line of credit (“Credit Facility”) with Austin Financial Serviceswere $1.7$0.8 million at March 31, 2020 and $0.7 million at December 31, 2019 and are recorded in the Condensed Consolidated Balance Sheets as a current liability under the caption, “Credit line borrowings.” Unamortized debtOutstanding balances include unamortized net issuance costs related to thetotaling $0.1 million for March 31, 2020 and December 31, 2019, respectively.

The Credit Facility were $0.1 millionis secured by a lien on our assets. Interest on advances under the line is due monthly at June 30, 2019. These costs are recordedthe “Prime Rate,” as current and long-term assets onpublished by the Condensed Consolidated Balance Sheets and have not been netted against the liability dueWall Street Journal from time to immateriality.time, plus a margin of 2%. The borrowing rate as of June 30,March 31, 2020 and December 31, 2019 was 7.50%. At June 30, 2019, we had $0.35.25% and 6.75%, respectively. Overdrafts are subject to a 2% fee. Additionally, an annual facility fee of 1% on the entire $5.0 million available for us to borrow underamount of the Credit Facility. Additional information regarding our Credit Facility is includeddue at the beginning of each of the three years and a 0.5% collateral management fee on the average outstanding loan balance is payable monthly. We paid Austin the first year’s fee when the Credit Facility was signed and the second year’s fee in December of 2019. Refer to Note 9 “Debt” toincluded under Item 8 of our 20182019 Annual Report which was filed with the SEC on April 1, 2019.Report.


DebtConvertible Notes

On March 29, 2019, the Company entered into a Note Purchase Agreement with Fusion Park LLC, F&S Electronic Technology (HK) Co., Ltd, Brilliant Start Enterprise Inc., Vittorio Viarengo and Amaury Furmin (collectively the “Investors”) for the purchase of an aggregatewe raised $1.7 million (before transaction expenses) from the issuance of $1.7 million in principal amount of subordinated convertible promissory notes to certain investors (the “Notes”“Convertible Notes”). The Convertible Notes which were issued to the Investors on March 29, 2019 and amended on May 29, 2019, havehad a maturity date of December 31, 2021 and bearbore interest at a rate of 5 percent5% per annum until June 30, 2019 and at a rate of 10 percent10% thereafter. The outstandingPursuant to their terms, on January 16, 2020 following approval by our stockholders of certain amendments to our certificate of incorporation, the principal amount of each Note, together with accruedall of the Convertible Notes,the accumulated interest (such principalthereon ($0.1 million) and interest,unamortized issuance costs at the “Aggregate Outstanding Amount”)date of conversion ($0.04 million), is convertiblewhich totaled $1.8 million converted at a conversion price of $0.67 per share into an aggregate of 2,709,018 shares of Series A Preferred Stock at a “Conversion Rate” determined by the arithmetic average of the volume-weighted average closing price of the Common Stock measured over a specified ten-trading-day period that ended on April 16, 2019, which equaled $0.67 per share. To calculate the number of shares of Series A Preferred Stock into which each Note may convert, the Aggregate Outstanding Amount of such Note will be divided by the Conversion Rate.
The Notes will automatically convert into shares of Series A Preferred Stock at the conversion rate on the first business day following the date that the Company’s stockholders approve the transactions contemplated by the Notes, including (a) the issuance of shares of Common Stock upon conversion of the shares of Series A Preferred Stock in excess of the number of shares of Common Stock permitted by NASDAQ Marketplace Rules, and (b) the increase in the number of authorized and available shares of Series A Preferred Stock pursuant to the Company’s Certificate of Incorporation, as amended.
The Company has accounted for this equity-linked hybrid instrument in accordance with applicable U.S. GAAP and, per analysis of the terms of the agreement, has determined it to be a debt-related instrument that does not require the equity-linked component to be bifurcated. The Company has recorded the Notes as short-term debt at cost in the amount of $1.7 million, as we expect the Notes to convert in less than 12 months. The issuance costs will be deferred and amortized until such time as the Notes convert. Unamortized debt issuance costs were $60 thousand at June 30, 2019. These costs are recorded as current and long-term assets on the Consolidated Balance Sheets and have not been netted against the liability due to immateriality.

19
18
ENERGY FOCUS, INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2019March 31, 2020
(Unaudited)

Convertible Preferred Stock, par value $0.0001 per share (“Series A Preferred Stock”), which is convertible on a one-for-one basis into shares of our common stock.

The purchase agreement related to the Convertible Notes contain customary representations and warranties and provide for resale registration rights with respect to the shares of our common stock issuable upon conversion of the Series A Preferred Stock. Please also refer to Note 9, “Stockholder’s Equity”.

Iliad Note

On November 25, 2019, we entered into a note purchase agreement (“the Iliad Note Purchase Agreement”) with Iliad Research and Trading, L.P. (“Iliad”) pursuant to which the Company sold and issued to Iliad a promissory note in the principal amount of approximately $1.3 million (“Iliad Note”). The Iliad Note was issued with an original issue discount of $142 thousand and Iliad paid a purchase price of $1.1 million for the issuance of the Iliad Note, after deduction of $15 thousand of Iliad transaction expenses.

The Iliad Note has a maturity date of November 24, 2021 and accrues interest at 8% per annum, compounded daily, on the outstanding balance. The Company may prepay the amounts outstanding under the Iliad Note at a premium, which is 15% during the first year and 10% during the second year. Beginning in May 2020, Iliad may require the Company to redeem up to $150 thousand of the Iliad Note in any calendar month. The Company has the right on three occasions to defer all redemptions that Iliad could otherwise require the Company to make during any calendar month. Each exercise of this deferral right by the Company will increase the amount outstanding under the Iliad Note by 1.5%.
The total liability for the Iliad Note Purchase Agreement, net of discount and financing fees, was $0.9 million at March 31, 2020 and $1.0 million at December 31, 2019. Unamortized loan discount and debt issuance costs were $0.2 million at March 31, 2020 and December 31, 2019.

In the event our common stock is delisted from NASDAQ, the amount outstanding under the Iliad Note will automatically increase by 15% as of the date of such delisting.
Pursuant to the Iliad Note Purchase Agreement and the Iliad Note, we have, among other things, agreed that, until the Iliad Note is repaid:
•10% of gross proceeds the Company receives from the sale of our common stock or other equity must be paid to Iliad and will be applied to reduce the outstanding balance of the Iliad Note (the failure to make such a prepayment is not an event of default under the Iliad Note, but will increase the amount then outstanding under the Iliad Note by 10%); and

•unless agreed to by Iliad, we will not engage in certain financings that involve the issuance of securities that include a conversion rights in which the number of shares of common stock that may be issued pursuant to such conversion right varies with the market price of our common stock (a “Restricted Issuance”); provided, however, if Iliad does not agree to a Restricted Issuance, the Company may on up to three occasions make the Restricted Issuance anyway, but the outstanding balance of the Iliad Note will increase 3% on each occasion the Company exercises its right to make the Restricted Issuance without Iliad’s agreement.

In accordance with the terms of the Iliad Note, 10% of the gross proceeds from the January 2020 Equity Offering ($275 thousand) were used to make payments on the Iliad Note, of which $226 thousand went towards the outstanding principal amount.

Upon the occurrence of an event of default under the Iliad Note, Iliad may accelerate the date for the repayment of the amount outstanding under the Iliad Note and increase the amount outstanding by an amount ranging from 5% to 15%, depending on the nature of the default. Certain insolvency and bankruptcy related events of default will result in the automatic acceleration of the amount outstanding under the Iliad Note and the outstanding amount due will be automatically increased by 5%. After the occurrence of an event of default, Iliad may elect to have interest accrue on the Iliad Note at a rate per annum of 22%, or such lesser rate as permitted under applicable law.


19

ENERGY FOCUS, INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2020
(Unaudited)
NOTE 8. INCOME TAXES


As a result of the operating loss incurred during each of the three and six months ended June 30,March 31, 2020 and 2019, and 2018, and after the application of the annual limitation set forth under Section 382 of the Internal Revenue Code (“IRC”), it was not necessary to record a provision for U.S. federal income tax or various states income taxes.


At June 30, 2019March 31, 2020 and December 31, 2018,2019, we had a full valuation allowance recorded against our deferred tax assets.
The valuation allowance was recorded due to uncertainties related to our ability to realize the deferred tax assets, primarily consisting of certain net operating loss carry-forwards. The valuation allowance is based on management’s estimates of taxable income by jurisdiction and the periods over which the deferred tax assets will be recoverable.


At December 31, 2018,2019, we had a net operating loss carry-forward of approximately $100.5$108.8 million for U.S. federal income tax purposes ($64.5 million for state and local income tax purposes.purposes). However, due to changes in our capital structure, approximately $46.0$54.5 million of the net operating loss carry-forward$108.8 million is available to offset future taxable income, and after the application of the limitations found underIRC Section 382 limitations. As a result of the IRC, we expectTax Cuts and Jobs Act of 2017 (“Act”), net operating loss carry-forwards generated in tax years beginning after December 31, 2017 can only offset 80% of taxable income and can be carried forward indefinitely. The $8.3 million and $8.7 million in net operating losses generated in 2019 and 2018 will be subject to have approximately $46.0 million of this amount available for use in 2019.the new limitations under the Act. If not used, theseutilized, the carry-forwards generated prior to December 31, 2017 of $37.3 million will begin to expire in 2021 for federal purposes and have begun to expire for state and local purposes. For a full discussion of the estimated restrictions on our utilization of net operating loss carry-forwards, please refer to Note 12, “Income Taxes,” included under Item 8 of our 20182019 Annual Report.

NOTE 9.STOCKHOLDERS’ EQUITY


Preferred Stock

Pursuant to the terms of the Convertible Notes, on January 16, 2020 following approval by our stockholders of certain amendments to our certificate of incorporation, the principal amount of all of the Convertible Notes and the accumulated interest thereon in the amount of $1.8 million converted at a conversion price of $0.67 per share into an aggregate of 2,709,018 shares of the Company’s Series A Convertible Preferred Stock, par value $0.0001 per share, which is convertible on a one-for-one basis into shares of our common stock.

The Series A Preferred Stock was created by the filing of a Certificate of Designation with the Secretary of State of the State of Delaware on March 29, 2019, which authorized 2,000,000 shares of Series A Preferred Stock (“Original Series A Certificate of Designation”). The Original Series A Certificate of Designation was amended on January 15, 2020 following stockholder approval to increase the number of authorized shares of Series A Preferred Stock to 5,000,000 (the Original Series A Certificate of Designation as so amended, the “Series A Certificate of Designation”). Of the 5,000,000 Series A Preferred Stock, 3,300,000 shares were further designated as Series A Convertible Preferred Stock.

Pursuant to the Series A Certificate of Designation, each holder of outstanding shares of Series A Preferred Stock is entitled to vote with holders of outstanding shares of common stock, voting together as a single class, with respect to any and all matters presented to the stockholders of the Company for their action or consideration, except as provided by law. In any such vote, each share of Series A Preferred Stock shall be entitled to a number of votes equal to 55.37% of the number of shares of common stock into which such share of Series A Preferred Stock is convertible.

The Series A Preferred Stock (a) has a preference upon liquidation equal to $0.67 per share and then participates on an as-converted basis with the common stock with respect to any additional distributions, (b) shall receive any dividends declared and payable on our common stock on an as-converted basis, and (c) is convertible at the option of the holder into shares of our common stock on a one-for-one basis. We also filed a Certificate of Elimination with respect to its authorized, but unissued, Series A Participating Preferred Stock, to return such shares to the status of preferred stock available for designation as the Series A Preferred Stock.

The purchase agreement related to the Convertible Notes contain customary representations and warranties and provide for resale registration rights with respect to the shares of our common stock issuable upon conversion of the Series A Preferred Stock.

20
ENERGY FOCUS, INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2020
(Unaudited)
January 2020 Equity Offering

Issuance of Common Stock and Warrants

In January 2020, we completed a registered direct offering for the sale of 3,441,803 shares of our common stock to certain institutional investors, at a purchase price of $0.674 per share. We also sold, to the same institutional investors, warrants to purchase up to 3,441,803 shares of common stock at an exercise price of $0.674 per share in a concurrent private placement for a purchase price of $0.125 per warrant. We paid the placement agent commissions of $193 thousand plus $50 thousand in expenses in connection with the registered direct offering and the concurrent private placement and we also paid legal, accounting and other fees of $231 thousand related to the offering. Total offering costs of $474 thousand have been presented as a reduction of additional paid-in capital and have been netted within equity. In addition, we issued warrants to the placement agent to purchase up to 240,926 shares of common stock at an exercise price of $0.9988 per share. Net proceeds to us from the sale of common stock and warrants were approximately $2.3 million. In accordance with the terms of the Iliad Note, 10% of the gross proceeds from the January 2020 Equity Offering ($275 thousand) were used to make payments on the Iliad Note, of which $226 thousand went towards the outstanding principal amount.

As of March 31, 2020, we had the following outstanding non-tradeable, registered warrants to purchase shares of common stock:

Number of Underlying SharesExercise PriceExpiration
Investor Warrants3,441,803$0.6740January 13, 2025
Placement Agent Warrants240,926$0.9988January 13, 2025
3,682,729

Warrant Liabilities

We account for common stock warrants as either liabilities or as equity instruments depending on the specific terms of the warrant agreement. Common stock warrants that could require cash settlement are accounted for as liabilities. We classify these warrant liabilities on the consolidated balance sheet as a current liability. The warrant liabilities are revalued at fair value at each balance sheet date subsequent to the initial issuance. Changes in the fair market value of the warrant are reflected in the consolidated statement of operations as income (expense) based upon the change in fair value of warrants.

The warrants we issued in the January 2020 registered direct offerings contain a provision for a cash payment in the event that the shares are not delivered to the holder within two trading days. The cash payment equals $10 per day per $1,000 of warrant shares for each day late. The warrants issued in the January 2020 private placement also contain a provision for net cash settlement in the event that there is a fundamental transaction (e.g., merger, sale of substantially all assets, tender offer, or share exchange). If a fundamental transaction occurs in which the consideration issued consists of all cash or stock in a non-public company, then the warrant holder has the option to receive cash equal to a Black-Scholes value of the remaining unexercised portion of the warrant.

The warrants have been classified as liabilities, as opposed to equity, due to the potential adjustment to the exercise price that could result upon late delivery of the shares or potential cash settlement upon the occurrence of certain events as described above, and are recorded at their fair values at each balance sheet date.

Stock-based compensation


Stock-based compensation expense is attributable to stock options and restricted stock unit awards. For all stock-based awards, we recognize expense using a straight-line amortization method.


21
ENERGY FOCUS, INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2020
(Unaudited)
The following table summarizes stock-based compensation expense (income) and the impact it had on operations for the periods presented (in thousands):


Three months ended
March 31,
20202019
Cost of sales$1  $7  
Product development1  28  
Selling, general, and administrative18  508  
Total stock-based compensation$20  $543  
 Three months ended
June 30,		 Six months ended
June 30,
 2019 2018 2019 2018
Cost of sales$—
 $10
 $7
 $19
Product development(6) 30
 22
 55
Selling, general, and administrative(14) 195
 494
 356
Total stock-based compensation$(20) $235
 $523
 $430


Total unearned stock-based compensation was $0.1$0.2 million at June 30, 2019,March 31, 2020, compared to $1.3$0.4 million at June 30, 2018.March 31, 2019. These costs will be charged to expense and amortized on a straight-line basis in future periods. The weighted average period over which the unearned compensation at June 30, 2019March 31, 2020 is expected to be recognized is approximately 1.32.7 years.

Pursuant to agreements dated March 29, 2019, and effective April 1, 2019, Theodore L. Tewksbury III resigned as Chairman of the Board, Chief Executive Officer and President, and Jerry Turin resigned as Chief Financial Officer and Secretary. In accordance with their separation agreements, Theodore Tewksbury’s outstanding restricted stock units vested immediately and one-third of Jerry Turin’s outstanding restricted stock units vested immediately. Any stock options vested for Theodore Tewskbury as of April 1, 2019, shall remain exercisable for one year following. All unvested stock options were cancelled. The impact of the accelerated vesting of the restricted stock units and cancellation of the stock options was recognized during the three months ended March 31, 2019 and totaled $0.3 million.



20
ENERGY FOCUS, INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2019
(Unaudited)



Stock options


The fair value of each stock option is estimated on the date of grant using the Black-Scholes option pricing model. Estimates utilized in the calculation include the expected life of the option, risk-free interest rate, and expected volatility, and are further comparatively detailed as follows:


Three months ended
March 31,
20202019
Fair value of options issued$0.22  $—  
Exercise price$0.30  $—  
Expected life of options (in years)6.10
Risk-free interest rate0.7 %— %
Expected volatility92.8 %— %
Dividend yield0.0 %0.0 %
 Six months ended
June 30,
 2019 2018
Fair value of options issued$—
 $1.74
Exercise price$—
 $2.46
Expected life of options (in years)—
 5.8
Risk-free interest rate—% 2.3%
Expected volatility—% 84.3%
Dividend yield0.0% 0.0%


A summary of option activity under all plans for the sixthree months ended June 30, 2019March 31, 2020 is presented as follows:


Number of
Options		Weighted
Average
Exercise
Price Per
Share		Weighted
Average
Remaining
Contractual
Life (in years)
Balance at December 31, 2019777,153  $1.04  
Granted431,250  0.30  
Canceled/forfeited(29,800) 0.47  
Expired—  —  
Balance at March 31, 20201,178,603  $0.78  8.0
Vested and expected to vest at March 31, 2020868,008  $0.93  7.9
Exercisable at March 31, 2020113,353  $4.59  5.8

22
 Number of
Options		 Weighted
Average
Exercise
Price Per
Share		 Weighted
Average
Remaining
Contractual
Life (in years)
Balance at December 31, 2018292,871
 $3.78
  
Canceled/forfeited(129,896) 2.67
  
Balance at June 30, 2019162,975
 $4.67
 5.5
      
Vested and expected to vest at June 30, 2019162,629
 $4.67
 5.5
      
Exercisable at June 30, 2019157,701
 $4.72
 5.5


21
ENERGY FOCUS, INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2019March 31, 2020
(Unaudited)


Restricted stock units


A summary of restricted stock unit activity under all plans for the sixthree months ended June 30, 2019March 31, 2020 is presented as follows:

Restricted
Stock Units		Weighted
Average
Grant
Date
Fair Value		Weighted
Average
Remaining
Contractual
Life (in years)
Balance at December 31, 201933,051  $2.63  
Granted80,000  0.30  
Released  (19,873) 2.72  
Canceled/forfeited  —  —  
Balance at March 31, 202093,178  $0.61  8.7


 Restricted
Stock Units		 Weighted
Average
Grant
Date
Fair Value		 Weighted
Average
Remaining
Contractual
Life (in years)
Balance at December 31, 2018546,858
 $2.54
  
Granted27,187
 1.16
  
Released(377,894) 2.54
  
Canceled/forfeited(152,441) 2.32
  
Balance at June 30, 201943,710
 $2.62
 1.5

NOTE 10.COMMITMENTS AND CONTINGENCIES


We may be the subject of threatened or pending legal actions and contingencies in the normal course of conducting our business. We provide for the costs related to these matters when a loss is probable, and the amount can be reasonably estimated. The effect of the outcome of these matters on our future results of operations and liquidity cannot be predicted because any such effect depends on future results of operations and the amount or timing of the resolution of such matters. For certain types of claims, we maintain insurance coverage for personal injury and property damage, product liability and other liability coverages in amounts and with deductibles that we believe are prudent, but there can be no assurance that these coverages will be applicable or adequate to cover adverse outcomes of claims or legal proceedings against us.Purchase Commitments


As of June 30, 2019,March 31, 2020, we had approximately $0.9$3.4 million in outstanding purchase commitments for inventory. Of this amount, approximately $0.6$2.5 million is expected to ship in the thirdsecond quarter of 20192020 with the balance expected to ship in the third and fourth quarter of 2019 and the first quarterquarters of 2020.


NOTE 11. SUBSEQUENT EVENTS

On April 17, 2020, the Company was granted a loan from KeyBank National Association in the amount of approximately $795 thousand, pursuant to the Paycheck Protection Program (the “PPP”) under Division A of the Coronavirus Aid, Relief and Economic Securities Act (the "CARES Act"), which was enacted on March 27, 2020. The loan accrues interest at a rate of 1.0% per annum and matures on April 17, 2022. The funds were received on April 20, 2020. Under the terms of the PPP, certain amounts of the loan may be forgiven if they are used for qualifying expenses as described in the CARES Act. The Company intends to use the entire loan amount for qualifying expenses, however there is no assurance that the Company will obtain forgiveness for any portion of the loan.

On April 16, 2020, NASDAQ announced that, in response to the COVID-19 pandemic and related extraordinary market conditions, it is providing temporary relief through June 30, 2020 from, among other rules, the $1.00 minimum bid price rule. As a result, Energy Focus has until July 24, 2020 to come into compliance with the $1.00 minimum bid price rule. Energy Focus is evaluating its options to come into compliance, including, in the discretion of its board of directors, effectuating a reverse stock split of its common stock at a ratio of at least 1-for-2 and up to 1-for-20, which discretionary reverse stock split has been approved by Energy Focus’ stockholders, provided it occurs no later than June 17, 2020.
23

ITEM 2.MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS


The following discussion and analysis of our financial condition and results of operations should be read in conjunction with the financial statements and related notes thereto, included under Item 1 of this Quarterly Report, as well as the section entitled “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included under Item 7 of our 20182019 Annual Report.


Overview


Energy Focus, Inc. and its subsidiary engageengages in the design, development, manufacturing, marketing and sale of energy-efficient lighting systems.systems and controls. We develop, market and sell high quality energy-efficient light-emitting diode (“LED”) lighting products and controls in the commercial and military markets.maritime markets (“MMM”). Our mission is to enable our customers to run their facilities and offices with greater energy efficiency, productivity, and wellness through advanced LED retrofit solutions. Our goal is to be the retrofitLED lighting technology and market leader for the most demanding applications where performance, quality and health really matter.are considered paramount. We specialize in LED lighting retrofit by replacing fluorescent, lamps in general purpose and high-intensity discharge (“HID”) lighting and other types of lamps in low-bay and high-bayinstitutional buildings for primarily indoor lighting applications with our innovative, high-quality commercial and military tubular LED (“TLED”) and other LED products.products and controls.



Net sales decreased 36.3 percentincreased 19.1% for the sixthree months ended June 30, 2019March 31, 2020 as compared to the sixthree months ended June 30, 2018,March 31, 2019, primarily driven by a 53.9 percent decrease71.6% increase in military sales period over period. Net sales of our commercial products decreased by 20.5 percent12.5% for the sixthree months ended June 30, 2019March 31, 2020 as compared to the same prior year period. The sale cycles for the military market is dependent on many factors, including the availability of government funding, the timing and fulfillment of U.S. Navy awards, new ship construction, diversion of funds to other government needs, and the timing of vessel maintenance schedules. The sale cycles for our commercial target markets can range from several months to over one year and our financial results reflect volatility from the continued fluctuations in the timing, pace and size of commercial projects for a major healthcare customer.


At June 30, 2019, we had $2.2 millionDespite continuing progress in cash and cash equivalents, which includes $0.3 million restricted cash held, and a total of $3.4 millionthe last four quarters in debt, including approximately $1.7 million in funding from the issuance of subordinated convertible notes. During the first half of 2019, we took additional actions to reducereducing our operating expenses to be more commensurate with our sales volumes. These actions resulted in additional restructuring charges of $0.1 million in thelosses significantly from first quarter of 2019, the Company’s results reflect the challenges due to long and $0.1 millionunpredictable sales cycles, unexpected delays in the second quarter of 2019 for severancecustomer retrofit budgets and related benefits charges in connection with the elimination of twelve positions (three during the first quarter of 2019project starts, continuing aggressive price competition and nine during the second quarter of 2019) and the closing of our offices in San Jose, California and Taipei, Taiwan throughout the first half of 2019. Despite these actions, we continuean intensely competitive lighting industry going through constant change. We continued to incur losses and the fact we have a substantial accumulated deficit, raisingwhich continue to raise substantial doubt about our ability to continue as a going concern at June 30, 2019.March 31, 2020.


SinceIn addition, the executive transitionCOVID-19 outbreak has and may continue to have a significant economic and business impact on April 1, 2019,our Company. In the first quarter we have continuedseen a down-turn in commercial sales as some customers in the healthcare and education industries delayed order placements in reaction to evaluate and assess strategic options as we seek to achieve a profitable business model and maximize value for our stockholders. Our plans to achieve profitably also include continuing to develop new technologies into sustainable product lines that allow us to effectively compete to expand our customer base, execute our marketing and sales plans, and continue to improve our supply chain and organizational structure. We will also continue to review and pursue selected external funding sources.

the crisis. We continue to believemonitor the potential impact of the COVID-19 outbreak. This includes evaluating the impact on our customers, suppliers, and logistics providers as well as evaluating governmental actions being taken to curtail the spread of the virus. The significance of the impact on us is still uncertain; however, a material adverse effect on our customers, suppliers, or logistics providers could significantly impact our operating results. We also plan to continue to actively follow, assess and analyze the development of the COVID-19 pandemic and stand ready to adjust our organizational structure, strategies, plans and processes to respond to the impacts from the virus spread in the timeliest manner.

Nevertheless, during the first quarter of 2020 we continued to see benefits from the relaunch efforts, described in our 2019 Annual Report, undertaken in the last three quarters of 2019. It is our belief that the combinationcontinued momentum of the efforts undertaken in 2019, along with the launch of new and innovative products will over time result in improved sales and bottom-line performance for the Company. Our 2020 newly launched EnFocus™ platform has been receiving positive feedback from early customers. The EnFocus™ platform is launched with two immediately available product lines: EnFocus™ DM, which provides a dimmable lighting solution, and EnFocus™ DCT, which provides both a dimmable and color tunable lighting solution. . In addition, significant efforts undertaken to reduce costs and become more competitive in the Company’s MMM business segment offerings has positioned us to be more competitive in this business segment to win bids and proposals that have allowed us to generate additional business during the first quarter of 2020 as well as the balance of the year, offsetting some of the slowdown being experience on the commercial side of the business. While we continue to pursue growth on the commercial side of our plansbusiness due to obtainits potential and size, the MMM sector does offer us a steady opportunity for continued sales, profitability and market leadership despite its overall smaller market potential.

24

Meanwhile, the Company continues to seek additional external funding restructuring actions, current financial position, liquid resources, obligations due or anticipated withinalternatives and sources particularly since it has not yet achieved profitability. We plan to achieve profitability through executing on our multi-channel sales strategy that targets key verticals such as government, healthcare, education and commercial & industrial, complemented by our marketing outreach campaigns, channel partnerships, and new sales from an e-commerce platform, which we plan to formally launch in the next year, executive reorganization, development and implementationsecond quarter of an excess inventory2020. We also plan and implementation of our product development and sales channel strategy, if adequately executed, will provide us with an ability to finance our operations through 2020 and will mitigate the substantial doubt about our ability to continue asto develop advanced lighting and lighting control applications built upon the EnFocusTM platform. In addition, we intend to continue to apply rigorous and financial disciplines in our organizational structure, business processes and policies, and supply chain practices to help accelerate our path towards profitability.

At March 31, 2020, we had $2.9 million in cash, which excludes $0.3 million restricted cash held, and a going concern.total of $1.7 million in debt, including $0.8 million outstanding on our revolving credit facility, $0.9 million relating to our Iliad Note and we had $0.8 million in warrant liability following the January 2020 Equity Offering. Additionally, at March 31, 2020, we had $1.1 million of additional availability for us to borrow under the revolving line of credit facility.



Results of operations


The following table sets forth items in our Condensed Consolidated Statements of Operations as a percentage of net sales for the periods indicated:


Three months ended
March 31,
20202019
Net sales100.0 %100.0 %
Cost of sales72.7  96.9  
Gross profit27.3  3.1  
Operating expenses:
Product development7.5  16.6  
Selling, general, and administrative53.6  70.5  
Restructuring(0.4) 4.2  
Total operating expenses60.7  91.3  
Loss from operations  (33.4) (88.2) 
Other expenses (income):
Interest expense3.5  1.4  
Income from change in fair value of warrants(23.1) —  
Other expenses0.5  0.6  
Net loss  (14.3)%(90.2)%
 Three months ended
June 30,		 Six months ended
June 30,
 2019 2018 2019 2018
Net sales100.0 % 100.0 % 100.0 % 100.0 %
Cost of sales103.5
 74.9
 100.2
 78.5
Gross profit (loss)(3.5) 25.1
 (0.2) 21.5
        
Operating expenses:       
Product development10.3
 13.0
 13.5
 13.2
Selling, general, and administrative51.7
 46.8
 61.3
 51.6
Restructuring4.2
 0.1
 4.2
 (0.5)
Total operating expenses66.2
 59.9
 79.0
 64.3
Loss from operations(69.7) (34.8) (79.2) (42.8)
        
Other expenses (income):       
Interest expense0.8
 —
 1.1
 —
Other expenses (income)2.6
 —
 1.6
 (0.2)
        
Net loss(73.1)% (34.8)% (81.9)% (42.6)%


Net sales


A further breakdown of our net sales is presented in the following table (in thousands):


Three months ended
March 31,
20202019
Commercial$1,736  $1,983  
MMM products2,047  1,194  
Total net sales$3,783  $3,177  

25
 Three months ended
June 30,		 Six months ended
June 30,
 2019 2018 2019 2018
Commercial products$2,131
 $2,972
 $4,114
 $5,177
Military products951
 2,200
 2,145
 4,654
Total net sales$3,082
 $5,172
 $6,259
 $9,831


Net sales of $3.1$3.8 million for the secondfirst quarter of 2020 increased compared to the first quarter of 2019 decreased 40.4 percent compared to the second quarter of 2018 primarily driven by a decreasean increase in militaryMMM product sales. Net sales of our commercial products decreased 28.3 percent in the secondfirst quarter of 2020 compared to the first quarter of 2019, compared to the second quarter of 2018, reflecting first,(i) lower sales from our agency network that we have been consolidating and deemphasizing for sales and marketing efforts since our restructuring in April 2019, and second,(ii) fluctuations in the timing, pace and size of commercial projects. Net sales of our military products decreased 56.8 percent in the second quarter of 2019 as compared to the second quarter of 2018, reflecting the timingprojects and fulfillment of U.S. Navy awards during the second quarter of 2018.

Net sales of $6.3 million for the first six months of 2019 decreased 36.3 percent compared to the same period in 2018 primarily driven by(iii) a decrease in military product sales. Net sales, of our commercial products decreased 20.5 percentcaused by delayed orders, have occurred mainly in the first six monthshealthcare and education industries because of 2019 comparedthe macroeconomic slowdown due to the same period in 2018, reflecting fluctuations in the timing, pace and size of commercial projects. Net sales of our military products decreased 53.9 percent in the first six months of 2019 compared to the same period in 2018. The sale cycles for the military market is dependent on many factors, including the availability of government funding, the timing and fulfillment of U.S. Navy awards, new ship construction and the timing of vessel maintenance schedules.COVID-19 pandemic.



Gross profit (loss)
 
Gross profit (loss) was $(0.1)$1.0 million, or (3.5) percent27.3% of net sales, for the secondfirst quarter of 2019,2020, compared to $1.3 million,$98 thousand, or 25.1 percent3.1% of net sales, for the secondfirst quarter of 2018. The 28.6 basis point decrease in gross margin percent in the second quarter of 2019 is primarily due to unfavorable inventory reserves as a percent of sales compared to the second quarter of 2018.2019. As a result of current manufacturing and sales volumes, gross margin for the secondfirst quarter of 20192020 included unfavorablefavorable warranty and inventory reserves of $0.5$91 thousand or 2.4% of net sales, offset by unfavorable outbound freight costs of approximately $80 thousand, or 2.1% of net sales. Gross margin for the first quarter of 2020 included unfavorable manufacturing variances and absorption of $0.3 million, or 14.7 percent7.2% of net sales, whereas gross margin for the secondfirst quarter of 2018 included unfavorable manufacturing and absorption of $0.3 million, or 5.6 percent of net sales.

Gross profit (loss) was $(11.0) thousand, or (0.2) percent of net sales, for the first six months of 2019 compared to $2.1 million, or 21.5 percent of net sales, for the first six months of 2018. The decrease is primarily related to unfavorable inventory reserves recorded during the first six months of 2019 of $0.4 million, or 6.8 percent of net sales. For the first six months of 2018, gross margin included unfavorable manufacturing variances and absorption of $0.6 million, or 5.7 percent of net sales, partially offset by net favorable excess inventory reserve adjustments of $0.4 million, or 4.0 percent11.8% of net sales.


Operating expenses


Product development
 
Product development expenses include salaries and related expenses, contractor and consulting fees, legal fees, supplies and materials, as well as overhead, such as depreciation and facility costs. Product development costs are expensed as they are incurred.


Product development expenses were $0.3 million for the secondfirst quarter of 2019,2020, a $0.4$0.2 million decrease compared to $0.7$0.5 million for the secondfirst quarter of 2018.2019. The decrease was primarily a result of lower product testing expenses due to the timing of new product introductions as well as lower salaries and related benefits due to the re-organizationelimination of two satellite research and re-alignmentdevelopment/engineering offices as part of the broader restructuring the Company that took placeundertook during the second quarter of 2019.


Product development expenses were $0.8 million for the first six months of 2019, a $0.5 million decrease compared to $1.3 million for the first six months of 2018. The decrease was primarily a result of lower product testing expenses, due to the timing of new product introductions as well as lower salaries and related benefits due to the re-organization and re-alignment of the Company that took place in the first half of 2019.

Selling, general andadministrative


Selling, general and administrative expenses were $1.6$2.0 million for the secondfirst quarter of 2019,2020, compared to $2.4$2.2 million for the secondfirst quarter of 2018.2019. The primary driversdriver of the decreased expenses were decreaseswas a decrease in stock-based compensation partly off-set by an increase in salaries and related benefits due to the lower headcount in 2019 and decreases in trade show and marketing expenses due to timing and efforts to reduce costs.our growth initiatives that expanded our staff, primarily in direct sales.

Selling, general and administrative expenses were $3.8 million for the first six months of 2019, compared to $5.1 million for the first six months of 2018. The $1.3 million decrease is the direct result of our decreases in salaries and related benefits of $0.7 million and decreases in sales commissions and legal expenses of $0.1 million. The lower expenses were partially offset by increased consulting expenses of $0.1 million in the first six months of 2019.


Restructuring

During the first half of 2019, we implemented phased actions to reduce costs in order to minimize cash usage while continuing to pursue strategic alternatives. The actions taken were limited to an initial phase while the options under strategic review were considered and evaluated, including the issuance of subordinated convertible notes as discussed in Note 7, “Debt,” included under Item 1 of the Quarterly Report.

Our initial actions included the elimination of twelve positions (three during the first quarter of 2019 and nine during the second quarter of 2019), costs associated with closing our offices in San Jose, California and Taipei, Taiwan during the first half of 2019, restructuring of the sales organization and incentive plan, flattening of the senior management team, additional operational streamlining, management compensation reductions, and outsourcing of certain functions including warehousing and marketing. In connection with these actions, we recorded severance and related benefits charges of $0.2 million during the six months ended June 30, 2019.


Our restructuring liabilities consist of estimated ongoing costs related to long-term operating lease obligations. The recorded value of the ongoing lease obligations is based on the remaining lease term and payment amount, discounted to present value. Changes in subsequent periods resulting from a revision to either the timing or the amount of estimated cash flows over the future period are measured using the credit adjusted, risk free rate that was used to measure the restructuring liabilities initially. Please also refer to Note 6, “Leases” as certain amounts formerly included below in the restructuring reserve as of December 31, 2018, have been reclassified on the balance sheet to be shown netted against the restructured lease, right-of-use asset in accordance with Topic 842.


For the sixthree months ended June 30, 2018,March 31, 2020, we recorded restructuring credits totaling approximately $0.05 million, primarily$14 thousand related to the revision of our initial estimates of the cost and offsetting sublease income for the remaining lease obligations for the former New York, New York and Arlington, Virginia offices.office. For additional information regarding the restructuring actions taken in the 2017 and 2019, please refer to Note 3, “Restructuring,” included under Item 8 of our 20182019 Annual Report.


While substantial doubt about our abilityDuring the three months ended March 31, 2019, we recorded severance and related benefits charges of $0.1 million.

Interest expense

Interest expense was $133 thousand for the first quarter of 2020, compared to continue asinterest expense of $43 thousand for the first quarter of 2019. The increase in interest expense of $90 thousand was a going concern continued to exist at June 30, 2019, the impactresult of increased amortization of the restructuring actions and initiatives described above, have reduceddebt financing costs in the first quarter of 2020. The actual cash interest paid in the first quarter of 2020 was $67 thousand compared to $21 thousand in the first quarter of 2019.

Income from change in fair value of warrants

Income of $0.9 million was recognized during the three months ended March 31, 2020 for the market value change in our operating expenses to be more commensurate with our sales volumes. Despite this, we continue to incur losses and havewarrant liabilities. The income recognized in the first quarter of 2020 was a substantial accumulated deficit, raising substantial doubt about our ability to continue as a going concernresult of the revaluation of the warrant liability using the market price of the Company’s stock at both DecemberMarch 31, 2018 and June 30, 2019. Considering both quantitative and qualitative information, we continue to believe that2020 versus the combinationmarket price of our plans to obtain additional external funding, restructuring actions, current financial position, liquid resources, obligations due or anticipated within the next year, executive reorganization, development and implementationCompany’s stock at the time of an excess inventory plan, and implementationinitial issuance of our product development and sales channel strategy, if adequately executed, will provide us with an ability to finance our operations through 2020 and will mitigate the substantial doubt about our ability to continue as a going concern. Please refer to Note 7, “Debt,” included under Item 1 of this Quarterly Report for more information on the additional financing we received on March 29, 2019 to fund our near-term operations.warrants (January 13, 2020).

26


Other expenses (income)


Other expense was $79$18 thousand for the secondfirst quarter of 2019,2020, compared to other expense of $2 thousand for the second quarter of 2018. Other expense was $98 thousand for the six months ended June 30, 2019 compared to other income of $19 thousand for the six months ended June 30, 2018. Thefirst quarter of 2019. Other expenses in 2019 primarily consistedare mainly comprised of non-cash amortization of deferred financing costs related to the revolving credit facility we entered into on December 11, 2018. The income in 2018 related to the gain on the sale of equipment previously classified as held for sale.bank and collateral management fees.


Provision for income taxes


Due to the operating losses incurred during the three and six months ended June 30,March 31, 2020 and 2019, and 2018, and after application of the annual limitation set forth under Section 382 of the IRC, it was not necessary to record a provision for U.S. federal income tax or various states income taxes as income tax benefits are fully offset by a valuation allowance recorded.


Net loss


For the three months ended June 30, 2019,March 31, 2020, our net loss was $2.3$0.5 million, compared to $1.8$2.9 million for the three months ended June 30, 2018.March 31, 2019. The increasedecrease in the net loss was primarily driven by the lower product development, sales, general and administrative expenses and higher overall gross profit in the first quarter of 2019, partially offset by lower operating expenses,margins as previously discussed.


For the six months ended June 30, 2019, our net loss was $5.1 million, compared to $4.2 million for the six months ended June 30, 2018. The increase in net loss was primarily driven by the lower gross profit during the first half of 2019, partially offset by lower operating expenses as previously discussed.

Financial condition


While we had cash and cash equivalents of $2.2$2.9 million at June 30, 2019,March 31, 2020, which includesexcludes $0.3 million restricted cash held, we had a total of $3.4$1.7 million in debt, including $1.7$0.8 million outstanding on our revolving credit facility and $1.7$0.9 million relating to the Iliad Note and we had $0.8 million in subordinated convertible notes.warrant liability following the January 2020 Equity Offering. At March 31, 2020, we had $1.1 million of additional availability for us to borrow under the revolving line of credit facility. We have historically incurred substantial losses, and as of June 30, 2019,March 31, 2020, we had an accumulated deficit of $122.6$125.4 million. Additionally, our sales have been concentrated in a few major customers and for the sixthree months ended June 30, 2019,March 31, 2020, two customers accounted for approximately 17 percent and 28 percent53% of net sales.



As a result of the restructuring actions and initiatives described above, we have reduced our operating expenses to be more commensurate with our sales volumes, however,volumes. However, we continue to incur losses and have a substantial accumulated deficit, and
substantial doubt about our ability to continue as a going concern continues to exist at June 30, 2019.March 31, 2020.


Since the executive transition on April 1, 2019, we have continued to evaluate and assess strategic options as we seek to achieve a profitable business model and maximize value for our stockholders. Our plansprofitability. We plan to achieve profitability includethrough growing our sales by continuing to develop new technologies into sustainable product linesexecute on our multi-channel sales strategy that allow us to effectively compete to expand our customer base, executetargets key verticals such as government, healthcare, education and commercial and industrial, complemented by our marketing outreach campaigns, channel partnerships, and additional sales plans, andfrom a new e-commerce platform, which we plan to launch in the second quarter of 2020. We also plan to continue to improvedevelop advanced lighting and lighting control technologies and introduce impactful new products such as the EnFocus™, a breakthrough lighting control platform we officially launched during the second quarter of 2020. In addition, we continue to apply rigorous and financial disciplines in our organizational structure, business processes and policies, and supply chain practices to help accelerate our path towards profitability.

As described in Note 9, we also raised approximately $2.3 million of net proceeds upon the issuance of common stock and organizational structure. warrants under the January 2020 Equity Offering

The restructuring and cost cutting initiatives implemented during 2017 and 2019 as well as the January 2020 equity offering that significantly strengthened our balance sheet were designed to allow us to effectively execute this strategy; however,these strategies. However, our efforts may not occur as quickly as we envision or be successful, due to the long sales cycle in our industry, the corresponding time required to ramp up sales from new products and markets into this sales cycle, the timing of introductions of additional new products, significant competition, and potential sales volatility given our customer concentration, and the recent and lingering economic impact from COVID-19 pandemic, among other factors. As a result, we will continue to review and pursue selected external funding sources to ensure adequate financial resources to execute across the timelines required to achieve these objectives including, but not limited to, the following:


•obtaining financing from traditional or non-traditional investment capital organizations or individuals; and
•obtaining funding from the sale of our common stock or other equity or debt instruments.instruments; and

•obtaining debt financing with lending terms that more closely match our business model and capital needs.

There can be no assurance that we will obtain funding on acceptable terms, in a timely fashion, or at all. Obtaining
27

additional funding contains risks, including:


•additional equity financing may not be available to us on satisfactory terms and any equity we are able to issue could lead to dilution for current stockholders and have rights, preferences and privileges senior to our common stock;
•loans or other debt instruments may have terms and/or conditions, such as interest rate, conversion price, restrictive covenants, conversion features, refinancing demands, and control or revocation provisions, which are not acceptable to management or our board of directors; and
•the current environment in capital markets combined with our capital constraints may prevent us from being able to obtain adequate debt financing.


If we fail to obtain the required additional financing to sustain our business before we are able to produce levels of revenue to meet our financial needs, we will need to delay, scale back or eliminate our business plan and further reduce our operating costs and headcount, each of which would have a material adverse effect on our business, future prospects, and financial condition. A lack of additional funding could also result in our inability to continue as a going concern and force us to sell certain assets or discontinue or curtail our operations and, as a result, investors in the Company could lose their entire investment.


Considering both quantitative and qualitative information, we continue to believe that the combination of our plans to obtain additional external funding restructuring, timely reorganizational actions, current financial position, liquid resources, obligations due or anticipated within the next year, executive reorganization, development and implementation of an excess inventory reduction plan, application and implementationsuccessful acquisition of a Payroll Protection Plan (“PPP”) loan during April 2020, plans and initiatives in our R&D, product development and sales and marketing, development of potential channel strategy,partnerships, if adequately executed, will provide us with an ability to finance our operations through 2020the next twelve months and will mitigate the substantial doubt about our ability to continue as a going concern.


On May 15, 2019, we received a letter from the Nasdaq Stock Market (“NASDAQ”) advising us that for 30 consecutive trading days preceding the date of the letter, the bid price of our common stock had closed below the $1.00 per share minimum required for continued listing on NASDAQ pursuant to listing rules. Therefore we could be subject to delisting if we did not regain compliance within the compliance period or extend the compliance period by filing for an extension. On October 15, 2019, the Company formally requested a 180-day extension beginning November 12, 2019 and is evaluating options to regain compliance.

On April 16, 2020, NASDAQ announced that, in response to the COVID-19 pandemic and related extraordinary market conditions, it is providing temporary relief through June 30, 2020 from, among other rules, the $1.00 minimum bid price rule. As a result, Energy Focus has until July 24, 2020 to come into compliance with the $1.00 minimum bid price rule. Energy Focus is evaluating its options to come into compliance, including, in the discretion of its board of directors, effectuating a reverse stock split of its common stock at a ratio of at least 1-for-2 and up to 1-for-20, which discretionary reverse stock split has been approved by Energy Focus’ stockholders, provided it occurs no later than June 17, 2020.

Subsequent to quarter-end on April 17, 2020, the Company was granted a loan from KeyBank National Association in the amount of approximately $795 thousand, pursuant to the Paycheck Protection Program (the “PPP”) under Division A of the Coronavirus Aid, Relief and Economic Securities Act (the "CARES Act"), which was enacted on March 27, 2020. The loan accrues interest at a rate of 1.0% per annum and matures on April 17, 2022. The funds were received on April 20, 2020. Under the terms of the PPP, certain amounts of the loan may be forgiven if they are used for qualifying expenses as described in the CARES Act. The Company intends to use the entire loan amount for qualifying expenses and hence at this time the Company expects the loan will be forgiven. However, there is no assurance that the Company will obtain forgiveness for any portion of the loan.

Liquidity andcapitalresources
Cash and cash equivalents
At June 30, 2019,March 31, 2020, our cash and cash equivalents balance was approximately $2.2$2.9 million, compared to approximately $6.3$0.4 million at December 31, 2018.2019. The balance at June 30, 2019March 31, 2020 and December 31, 2018 included2019 excluded restricted cash of $0.3 million for a letter of credit requirement under a lease obligation.



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The following summarizes cash flows from operating, investing, and financing activities, as reflected in the Condensed Consolidated Statements of Cash Flows (in thousands):
Three months ended
March 31,
20202019
Net cash provided by (used in) operating activities$504  $(3,556) 
Net cash used in investing activities$(47) $(4) 
Net cash provided by financing activities$2,104  $1,086  
 Six months ended
June 30,
 2019 2018
Net cash used in operating activities$(5,120) $(2,300)
    
Net cash (used in) provided by investing activities$(28) $183
    
Net cash provided by (used in) financing activities$1,015
 $(18)



Net cash used inprovided by (used in) operating activities


Net cash provided by operating activities was $0.5 million for the three months ended March 31, 2020. The net loss was $0.5 million and was adjusted for non-cash items, including: depreciation and amortization, stock-based compensation, change in fair value of warrant liabilities, provisions for inventory, warranty reserves and working capital changes. The primary driver for a positive operating cash flow was the generation of $1.5 million cash from the utilization of existing inventory stock as opposed to new purchases. During the three months ended March 31, 2020, we used $0.2 million in cash for accounts payable, primarily due to the timing of inventory receipts and we used $0.2 million of prepaid and other assets due to prepaid deposits to our contract manufacturers for inventory for the new EnFocus™ platform. We generated cash of $0.4 million through the collection of accounts receivable and $0.2 million through a decrease of other accrued liabilities, primarily related to accrued payroll and benefits and commissions. Cash generated was partially offset by an adjustment of $0.9 million for change in fair value of warrants.

For the three months ended March 31, 2019, net cash used in operating activities was $5.1$3.6 million, for the six months ended June 30, 2019, and resulted primarily from the net loss incurred of $5.1$2.9 million, adjusted for non-cash items, including: depreciation, stock-based compensation, and provisions for inventory and warranty reserves, and working capital changes. During the sixthree months ended June 30,March 31, 2019, we used $1.5$1.3 million in cash for accounts payable, primarily due to the timing of inventory receipts and payments, and $0.4$0.2 million through a decreasean increase in accounts receivable, due to the higher shipments in the first half ofMarch 2019 as compared to December 2018. In addition, prepaid and other assets decreased by $0.4$0.5 million as the inventory for which we paid deposits to our contract manufacturers in prior quarters was received in the first quarter of 2019.


Net cash used in operating activities was $2.3 million for the six months ended June 30, 2018, and resulted primarily from the net loss incurred of $4.2 million, adjusted for non-cash items, including: depreciation, stock-based compensation, provisions for inventory and warranty reserves and working capital changes. During the six months ended June 30, 2018, we generated cash of $1.5 million through an increase in accounts payable, due to our payment terms with our vendors; $0.4 million through reduction in our inventory, due to the volume and timing of inventory receipts; and $0.2 million through the collection of accounts receivable, due to the timing and volume of our shipments in December 2017 compared to June 2018. Partially offsetting these increases in cash was an increase in prepaid and other assets of $0.4 million, related to deposits paid to our contract manufacturers on inventory to be shipped in subsequent quarters.

Net cash (used in) provided by investing activities


Net cash used in investing activities was $28$47 thousand for the sixthree months ended June 30, 2019,March 31, 2020 and resulted primarily from the purchase of tooling to support production operations. Net

For the three months ended March 31, 2019, net cash provided byused in investing activities was $0.2 million for the six months ended June 30, 2018,$4 thousand, and resulted primarily from the salepurchase of certain equipment previously classified as held for sale, partially offset by purchases of computer equipment, equipmenttooling to support production operations and leasehold improvements.operations.


Net cash provided by (used in) financing activities


Net cash provided by financing activities during the sixthree months ended June 30,March 31, 2020 was $2.1 million, primarily resulting from the $2.8 million in proceeds received from the share issuance in January 2020, partially offset by $0.5 million in offering costs for the issuance and an issuance related mandatory repayment of the Iliad note of which $0.2 million was allocated against principal. At March 31, 2020, we had $1.1 million of additional availability for us to borrow under the Credit Facility.

Net cash provided by financing activities during the three months ended March 31, 2019 was $1.0$1.1 million, primarily resulting from the $1.7 million in proceeds we received for the subordinated convertible notes we entered into on March 29, 2019, partially offset by net repayments of $0.6$0.5 million on borrowings under the credit facility we entered into on December 11, 2018. In addition, we used approximately $0.1 million to issue and immediately repurchase our stock for employee tax withholding related to restricted stock unit vesting during the period. Net cash used in financing activities during the six months ended June 30, 2018 was $18 thousand, resulting from issuing and immediately repurchasing our stock for employee tax withholding related to restricted stock unit vesting.


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Contractual obligations


As of June 30, 2019,March 31, 2020, we had approximately $0.9$3.4 million in outstanding purchase commitments for inventory. Of this amount, approximately $0.6$2.5 million is expected to ship in the thirdsecond quarter of 20192020 with the balance expected to ship in the third and fourth quarter of 2019 and the first quarterquarters of 2020.


There have been no other material changes to our contractual obligations as compared to those included in our 20182019 Annual Report.


Critical accounting policies


LeasesFair value of warrant liabilities


In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842), which supersedes the current lease accounting requirements. Additionally, in July 2018, the FASB issued ASU No. 2018-11, Leases (Topic 842): Targeted Improvements, which simplifies adoptionThe estimated fair value of Topic 842 by allowing an additional transition method that will not require restatement of prior periods and providingwarrants accounted for as liabilities, representing a new practical expedient for lessors to avoid separating lease and non-lease components within a contract if certain criteria are met (provisions of which must be elected upon adoption of Topic 842). The new standard requires a lessee to recordlevel 3 fair value measure, was determined on the balance sheetissuance date and subsequently marked to market at each financial reporting date. We use the assets andBlack-Scholes valuation model to value the warrant liabilities for the rights and obligations created by leases with lease terms of more than 12 months. It also requires lessees to disclose certain key information about lease transactions. Upon implementation, an entity’s lease payment obligations will be recognized at theirfair value. The fair value is estimated present value along with a corresponding right-of-use asset. Lease expense recognition will be generally consistent with current practice.

The Company adopted this guidance as of January 1, 2019 using the required modified retrospective method with the non-comparative transition option. The Company applied the transitional package of practical expedients allowed by the standard to not reassess the identification, classification and initial direct costs of leases commencing before this ASU’s effective date. The Company also applied the lease term and impairment hindsight transitional practical expedients. The Company has chosen to apply the following accounting policy practical expedients: to not separate lease and non-lease components to new leases as well as existing leases through transition; and the election to not apply recognition requirements of the guidance to short-term leases.

The results for reporting periods beginning after January 1, 2019 are presented under Topic 842, while prior period amounts are not adjusted and continue to be reported in accordance with legacy generally accepted accounting principles.

On adoption, we recognized additional operating lease liabilities of approximately $2.9 million, with corresponding right-of-use assetsexpected volatility based on the present value of the remaining minimum rental payments under prior leasing standards for our existing operating leases. The operating lease right-of-use assets recorded upon adoption were offset by the carrying value of liabilities previously recorded under Topic 420historical volatility and impairment charges totaling $273 thousand and $186 thousand, respectively.is determined using probability weighted-average assumptions, when appropriate.

Please refer to Note 6, “Leases,” included under Part I, Item 1 of this Quarterly Report for more information relating to the Company’s leasing arrangements.


There have been no other material changes to our critical accounting policies as compared to those included in our 20182019 Annual Report.Report on Form 10-K for the year ended December 31, 2019.


Certain risks and concentrations


We had certain customers whose net sales individually represented 10 percent or more of our total net sales, or whose net trade accounts receivable balance individually represented 10 percent or more of our total net trade accounts receivable, as follows:


For the three months ended June 30, 2019,March 31, 2020, sales to our primary distributor for the U.S. Navy and a regional commercial lighting retrofit company located in Texas accounted for approximately 13 percent38% and 26 percent15% of net sales, respectively. When sales to our primary distributor for the U.S. Navy are combined with sales to a shipbuildershipbuilders for the U.S. Navy, total net sales of products for the U.S. Navy comprised approximately 20 percent46% of net sales for the same period. For the three months ended June 30, 2018,March 31, 2019, sales to our primary distributor for the U.S. Navy a global healthcare provider located in Northeast Ohio, and a regional commercial lighting retrofit company located in Texas accounted for approximately 29 percent, 15 percent22% and 11 percent30% of net sales, respectively. When sales to our primary distributor for the U.S. Navy are combined with sales to a shipbuildershipbuilders for the U.S. Navy, total net sales of products for the U.S. Navy comprised approximately 33 percent32% of net sales for the same period.

For the six months ended June 30, 2019, sales to our primary distributor for the U.S. Navy and a regional commercial lighting retrofit company located in Texas accounted for approximately 17 percent and 28 percent of net sales, respectively. When sales to our primary distributor for the U.S. Navy are combined with sales to a shipbuilder for the U.S. Navy, total net sales of products for the U.S. Navy comprised approximately 26 percent of net sales for the same period. For the six months ended June 30, 2018, sales to our primary distributor for the U.S. Navy and a global healthcare provider located in Northeast Ohio accounted for approximately 37 percent and 12 percent of net sales, respectively. When sales to our primary distributor for the U.S. Navy are combined with sales to a shipbuilder for the U.S. Navy, total net sales of products for the U.S. Navy comprised approximately 41 percent of net sales for the same period.


A regional commercial lighting retrofit company located in Texas and our primary distributor for the U.S. Navy accounted for approximately 26 percent12% and 13 percent44% of net trade accounts receivable, respectively, at June 30, 2019.March 31, 2020. At December 31, 2018,2019, our primary distributor for the U.S. Navy accounted for approximately 40 percent10% of net trade accounts receivable and a large regional retrofit company accounted for 41.0% of our net trade accounts receivable.


Recent accounting pronouncements


For information on recent accounting pronouncements, please refer to Note 2, “Basis of Presentation and Summary of Significant Accounting Policies,” included under Part I, Item 1 of this Quarterly Report.



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ITEM 3. QUANTATATIVEQUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK


As a “smaller reporting company” as defined by Item 10 of Regulation S-K, the company is not required to provide information required by this item.


ITEM 4. CONTROLS AND PROCEDURES


Evaluation of disclosure controls and procedures
We maintain disclosure controls and procedures, as defined in Rule 13a-15(e) and Rule 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), that are designed to ensure that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the SEC, and that such information is accumulated and communicated to management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow for timely decisions regarding required disclosure.

Pursuant to Rule 13a-15(b) under the Exchange Act, our management must evaluate, with the participation of our Chief Executive Officer and Chief Financial Officer, the effectiveness of our disclosure controls and procedures, as of June 30, 2019,March 31, 2020, the end of the period covered by this report. Mr. James Tu, our current Chief Executive Officer, joined our board of directors on April 1, 2019 and became our Chief Executive officer on April 2, 2019. Mr. Tod A. Nestor, our current Chief Financial Officer, assumed that role on July 1, 2019. While our current Chief Financial Officer was not serving in such position as of June 30, 2019, management,Management, with the participation of our current Chief Executive Officer and Chief Financial Officer, did evaluate the effectiveness of our disclosure controls and procedures as of the end of period covered by this report. Based on this evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were not effective at a reasonable assurance level as of the end of the period covered by this report due to the material weakness in our internal control over financial reporting discussed below.
As previously disclosed in our quarterly report on Form 10-Q for the quarterly period ended March 31, 2019, we determined that we had a material weakness in our internal control over financial reporting primarily due to segregation of duties due to low staffing levels in the finance function that lead to the lack of sufficient levels of proper supervision and review by employees for non-routine accounting and related financial reporting matters. Such a conclusion reflects, in part, the departure of the Company’s previous Chief Financial Officer and Chief Executive Officer with signed agreements on March 29, 2019 that were effective April 1, 2019. In addition, the Company’s full-time Controller departed the Company on July 5, 2019. Until we are able to remedy our material weakness, we are relying on the assistance of third-party consultants to assist with accounting for non-routine transactions and certain financial reporting matters.2020.

However, this material weakness does have compensating controls in the form of:
•an independent audit committee of our board of directors;
•use of external consultants to assist with financial reporting;
•detailed written documentation of our internal control policies and procedures; and
•a Code of Business Conduct and Ethics and a whistleblower policy.

We have taken steps to enhance our internal control over financial reporting and plan to take additional steps to remediate the material weakness. Specifically:

As mentioned, as of July 1, 2019, we hired our new Chief Financial Officer and President, Tod A. Nestor, a licensed CPA, CMA, CFM, and CFA, and thirteen-year CFO, as well as former public company CFO who will focus on the development of the finance and accounting function. Mr. Nestor replaces the interim CFO role the CEO was fulfilling.
We plan to appoint additional qualified personnel to address inadequate segregation of duties. The Company continues to evaluate the organizational structure of the finance organization to identify the current gaps in the structure to meet the Company’s reporting needs, and expects to hire, retain, and develop the necessary talent to remediate the current material weakness deficiency. Ultimately, it is expected that internal employees will replace the consultants currently being used as an interim solution to assist in financial reporting. A key deliverable for our new CFO is to share a staffing plan with the Audit Committee during the second half of our 2019 fiscal year.
We expect to hire a full-time Controller with a CPA as a replacement for the departed Controller.
When necessary, we expect to outsource and seek guidance on complex U.S. GAAP-related issues from outside parties until an internal technical expert is hired on a full-time basis.

Management is aware of the risks associated with the lack of segregation of duties due to the small number of employees currently working with general administrative and financial matters. Due to the Company’s size and nature, segregation of all conflicting duties may not always be possible and may not be currently economically feasible. However, to the extent possible, the initiation of transactions, the custody of assets and the recording of transactions shall be performed by separate individuals. In addition, the Company will closely review all cash receipts and disbursements to insure an adequate control environment until more qualified resources can be added to the finance team.

The remediation efforts set out herein will continue to be implemented in our 2019 fiscal year. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues, if any, within our company have been detected.


Changes in internal control over financial reporting


During the quarterly period covered by this report, there have not been any changes in our internal control over financial reporting that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting apart from the aforementioned changes in personnel.reporting.





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PART II – OTHER INFORMATION


ITEM 1. LEGAL PROCEEDINGS


From time to time, we may be involved in various claims and legal actions arising in the ordinary course of business. As of June 30, 2019,March 31, 2020, we were not involved in any material legal proceedings.


ITEM 1A. RISK FACTORS


As a “smaller reporting company” as defined by Item 10 of Regulation S-K, the company is not required to provide information required by this item.


ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS


None.


ITEM 3. DEFUALTSDEFAULTS UPON SENIOR SECURITIES


None.


ITEM 4. MINE SAFETY DISCLOSURES


Not Applicable.


ITEM 5. OTHER INFORMATION


None.


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ITEM 6. EXHIBITS


EXHIBIT INDEX


Exhibit
Number		Description of Documents
Exhibit
Number
3.1 		Description of Documents
3.1
Certificate of Incorporation of Energy Focus, Inc. (incorporated by reference to Exhibit 3.1Appendix A to the Registrant’s QuarterlyDefinitive Proxy Statement on Schedule 14A filed on May 1, 2006).
3.2 
3.23.3 
3.4 
3.5 
3.33.6 
3.4
3.7 
3.8 
3.5
3.9 
3.6
3.10 
3.7
3.11 
10.13.12 
10.2
4.1 
10.3
4.2 
10.4
10.1 
10.5
10.2 
31.1
31.2
33

32.1 +
*101The following financial information from our Quarterly Report for the quarter ended June 30, 2019,March 31, 2020, formatted in XBRL (eXtensible Business Reporting Language): (i) Condensed Consolidated Balance Sheets at June 30, 2019March 31, 2020 and December 31, 2018,2019, (ii) Condensed Consolidated Statements of Operations for the three and six months ended June 30,March 31, 2020 and 2019, and 2018, (iii) Condensed Consolidated Statements of Comprehensive Loss for the three and six months ended June 30, 2019 and 2018, (iv) Condensed Consolidated Statements of Changes in Stockholders’ Equity for the three and six months ended June 30, 2019, (v)March 31, 2020, (iv) Condensed Consolidated Statements of Cash Flows for the sixthree months ended June 30,March 31, 2020 and 2019, and 2018, and (vi)(v) the Notes to Condensed Consolidated Financial Statements.
*104Cover Page Interactive Data File (embedded within the Inline XBRL document)
* Pursuant to Regulation S-T, this interactive data file is deemed not filed or part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933, is deemed not filed for purposes of Section 18 of the Securities Exchange Act of 1934, and otherwise is not subject to liability under these sections.

+ This exhibit shall not be deemed “filed” for purposes of Section 18 of the Securities Exchange Act of 1934, as amended (the “Exchange Act”) or otherwise subject to the liability of that Section. Such exhibit shall not be deemed incorporated into any filing under the Securities Act of 1933, as amended, or the Exchange Act.

34



SIGNATURES
 
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
 
ENERGY FOCUS, INC.
Date:May 13, 2020By:/s/ James Tu
James Tu
Executive Chairman and Chief Executive Officer
Principal Executive Officer

Date:May 13, 2020By:ENERGY FOCUS, INC.
Date:September 13, 2019By:/s/ James Tu
James Tu
Chairman and Chief Executive Officer
Tod A. Nestor
By:/s/ Tod A. Nestor
Tod A. Nestor
President, Chief Financial Officer and Secretary
Principal Financial and Accounting Officer



35